Clawing back waived fees

As profits of mutual fund and variable annuity companies come under pressure from the troubled equity markets, some fund sponsors could invoke an obscure but common provision in management contracts enabling them to recoup previously waived fund fees.

Those “claw-back” provisions are designed to help fund companies keep expenses of new funds competitive with bigger, more established funds by subsidizing the expenses of small funds. Once the fund reaches a size sufficient to cover its expenses, the manager can exercise a provision to recoup the expenses it previously absorbed.

Though that sleight-of-hand is approved by the Securities and Exchange Commission, it is seldom invoked. Indeed, only two of the 50 biggest fund management companies used the claw-back provision last year, according to an examination by New York-based fund data researcher Lipper Inc.

Massachusetts Financial Services Co. took back $291,805 in fees it had previously waived on its New Discovery Fund last year, according to financial statements of the Boston-based manager.

And New York money manager BlackRock Inc. recouped $228,421 in fees it had previously waived for three funds. BlackRock general counsel Robert Connolly didn’t return telephone calls seeking comment.

Most managers are not allowed to collect their full contractual fee after the fact, says Jeffrey Keil, Lipper’s Denver-based vice president of portfolio evaluation, performance and board reporting.

Tight controls

“Fund boards have tight controls on when monies may flow back to the manager, and usually the right time never comes about where competitive advantage is great enough to effectively increase the fee,” he adds. “Or the board feels that the manager is receiving enough compensation in other areas to cover the typically small bleeding.”

Still, some managers may be prompted to invoke the provision if they have previously waived fees on technology or sector funds whose shareholders are less sensitive to costs, observes Russel Kinnel, director of fund analysis at Morningstar Inc.

Fee claw-backs would be less likely for bond and index funds whose shareholders pay closer attention to expenses.