The Issue

The Securities and Exchange Commission ("SEC") staff recently has been focusing increasing attention on the various arrangements that mutual funds, and/ or their direct service provider (collectively, "Fund Complexes") enter into in with third-parties to provide certain services to the Fund Complex related to shareholder servicing. While the SEC staff ’s interest is not focused solely on retirement plan recordkeepers ("Recordkeepers"), the SEC staff has indicated that they are concerned with, among other things, the nature of the services provided in these arrangements, and the nature and amount of the compensation paid for these services. In each of these points of emphasis, the SEC staff has, either explicitly or implicitly, called into question whether Recordkeepers that are not registered with the SEC in some capacity should be registered as either broker-dealers or transfer agents.

The Solution

The SEC staff ’s focus on shareholder servicing arrangements may have business-model implications for unregistered Recordkeepers, and we believe that unregistered Recordkeepers should monitor the SEC staff ’s future statements related to this issue, and they may want to review their arrangements with Fund Complexes to assess them in light of the SEC staff ’s increased focus and stated concerns.


These services provided by Recordkeepers that are of interest to the SEC staff are primarily the processing of plan participant instructions as to purchases or sales of investments held in plan participants’ accounts, the transmission of aggregate plan orders to the mutual fund distributor or other agent of the mutual fund, and the maintenance of plan participant account records. The SEC staff has raised the question of whether the provision of these services may be sufficient to cause the Recordkeeper to be required to register with the SEC in some capacity. In its 2013 Examination Priorities Letter, the SEC staff stated that, in connection with its investment company and investment adviser examinations, it would "ask for information on third-party administrators, and may use this information to consider whether entities that provide these services are appropriately registered or exempt from registration."

The compensation received by Recordkeepers also is receiving increased focus from the SEC staff. Recordkeepers are compensated for the services that they provide to retirement plans in a variety of ways. Of particular interest to the SEC staff are the payments that Recordkeepers receive payments from the Fund Complexes whose mutual funds are held in their clients’ accounts for providing services to those plan clients that the Fund Complex would otherwise need to provide. These payments for services from Fund Complexes are subject to a variety of SEC rules, and the SEC staff will be focusing on whether the Fund Complexes are making these payments in a compliant manner. The SEC staff has indicated that they will "assess whether such payments are made in compliance with regulations, including Investment Company Act Rule 12b-1, or whether they are instead payments for distribution and preferential treatment.” Should the SEC staff become of the opinion that payments received by an unregistered Recordkeeper constitute payments for the distribution of mutual fund shares, this would call into question whether the Recordkeeper should have been registered as a broker-dealer to receive such compensation.