November 28, 2011 / 6:30 PM / 8 years ago

U.S. cash funds primed to recover waived fees

(Reuters) - Several companies in the money market fund industry, which has waived several billion dollars of fees over the past two years, are primed to recapture lost revenue from investors at a future date.

In a recent disclosure, for example, discount brokerage Charles Schwab Corp said it could potentially recover $878.2 million in previously waived fees from investors in a number of its money market funds. The fee recapture, as disclosed in an updated filing with the Securities and Exchange Commission, could take place over a three-year period that ends in 2014.

Peter Crane, president of Crane Data LLC, a company that tracks the money market industry, said he has noticed that several funds have mentioned the ability to recapture waived fees in recent prospectus updates and supplements. He also said these funds have warned investors of this “recoupment risk.”

In a near-zero interest rate environment, the funds are not in position to recapture previously waived fees just yet. But as one industry executive put it, funds are drawing a line in the sand to let investors know that fee recapture is coming.

“This recapture could negatively affect the funds’ future yield,” Schwab said in the recent SEC filing. A Schwab spokeswoman declined to provide further comment. Schwab’s U.S. Treasury Money Fund, for example, reported nearly $168 million in “recoupable expenses” over a three-year period.

Updated disclosures by Bank of America Corp also showed the amount for potential recovery from investors over a three-year period. The recovery could total about $113 million across several money market funds. The bank said in a recent SEC filing that no amounts were recovered during the 12 months that ended August 31.

Retail investors, in particular, already have weathered paltry yields because of historically low interest rates. But without the current benefit of fee waivers from the money market fund industry, many investors would have experienced negative yields.

Crane said fee recapture won’t be an issue until the U.S. Federal Reserve raises its Fed Funds rate to 0.50 percent, which could be anywhere from mid-2013 to early in 2014, or even beyond. Even then, he said a Fed Funds rate of 25 basis points to 50 basis points would only unwind fee waivers. He said money funds are waiving about half of their fees currently, charging 0.18 percent of average assets, compared with 0.36 percent a couple of years ago.

Money market funds waived an estimated $4.5 billion in expenses in 2010, or more than three times the amount waived in 2006, according to Investment Company Institute, a mutual fund industry trade group.

But not all money market fund advisers are interested in recapturing waived fees.

JPMorgan Chase & Co Inc spokeswoman Kristen Chambers said the bank can reinstate fees if the interest rate environment changes, but its funds don’t plan to claw back previously waived fees in future years.

“There are no scenarios where we would attempt to recoup waived fees,” Chambers said in an email.

JPMorgan’s $106 billion Prime Money Market Fund waived nearly $80 million in fees during the fiscal year that ended February 28. About $37 million of those fees were waived voluntarily. The rest was a contractual waiver, which is a routine way for a fund to lower its expenses to remain competitive.

State Street Global Advisors, the money management arm of Boston-based State Street Corp, has disclosed to investors that it does not have the ability to recover amounts waived or reimbursed from prior periods. Its U.S. money market assets total about $80 billion.

Fidelity Investments, the world’s second-largest mutual fund company, said it gives itself only a short horizon to recoup fees, if it chooses to do so. Fidelity had $432.2 billion in money market fund assets at the end of June.

“Fidelity has a policy that we may only recoup previously waived or reimbursed fees if we do so within the fund’s fiscal year,” Fidelity spokesman Vincent Loporchio said in an email statement. “If these waived fees are not recouped by the funds prior to the fund’s fiscal year-end, shareholders would pay less in annual fees than the disclosed fees.” (Reporting by Tim McLaughlin in Boston; Editing by Steve Orlofsky)

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