has agreed to an administrative settlement
with the SEC. The agreement allows the fund firm to put charges that it failed to disclose that it used directed-brokerage to reduce its revenue sharing obligations to broker-dealers without paying any fines or penalties.
The New York City-based fund firm neither admitted nor denied the SEC's findings as part of the settlement.
The SEC found that OppenheimerFunds of using directed-brokerage commissions from its funds to reduce the revenue-sharing obligations it incurred in exchange for shelf-space for its funds. "By using Fund assets in the form of brokerage commissions, OFI and OFDI avoided having to expend their own assets to meet revenue sharing obligations," according to the SEC.
OFI officers also failed to inform the funds' trustees of the arrangements, according to the SEC.
The revenue sharing deals between OppenheimerFunds Distributors (OFDI) and 25 unnamed brokerage firms were worth $90 million and took place between 2000 and 2003. The SEC also found that for the most part, they consisted of oral agreements and were never committed to writing.
Under the typical agreement, OFDI would pay 10 to 50 basis points on mutual fund sales and 2 to 25 bps on assets under management to the broker dealer. Those payments were to have been made from OFDI's assets and not those of the funds. However, the SEC found that OFDI reduced its obligations to the brokerages by sending them trades from its funds on which they collected commissions. In some instances, the brokerages charged more under this arrangement than they would have charged if OFDI paid cash.
In an example, the SEC noted that a particular revenue sharing arrangement obligated OFDI to pay $100,000 in cash to a broker-dealer for fund sales and assets, but that some broker-dealers allowed OFDI to satisfy the arrangement with $130,000 in brokerage commissions based on an agreed ratio of 1:1.3.
While the SEC said most conversion were flat (they used a 1:1 ratio), it added that about 25-35 percent of the revenue sharing arrangements used ratios of greater than 1:1.
OFDI and OppenheimerFunds ceased these practices in June of 2003 after hiring an external law firm to review its revenue sharing practices, according to the SEC. It also brought the practice to the attention of the funds' trustees.
In April 2004, OppenheimerFunds agreed with the trustees to repay $15.8 million to the funds to cover the cost of the directed brokerage. That amount was roughly $3.35 million more than the amount the brokerages had credited OppenheimerFunds because of the conversion ratios. OppenheimerFunds paid the funds on May 28, 2004.
Because OppenheimerFunds had already made the funds whole, the SEC did not impose and fines or reimbursements as a part of the settlement.
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