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DTCC introduces broker-to-broker mutual fund settlement service

04 November 2005  |  1558 views  |  0 Source: DTCC

The Depository Trust & Clearing Corporation (DTCC) announced that it is expanding the scope of its mutual funds' Commission Settlement service to include settlement of broker-to-broker transactions, an enhancement that will bring increased efficiencies to the mutual fund industry, particularly to those firms active in retirement planning.

"Expanding the service's functionality is an outgrowth of the way retirement plan processing commissions are handled today, where proprietary and non-proprietary fund investments both figure in a plan's offerings," said DTCC's James Kiernan, vice president, Relationship Management. "The new function will allow a broker/dealer, acting in the capacity of a retirement plan provider and/or record keeper for multiple fund families to process commissions across all mutual fund investment choices for initiating brokers."

Rita Gribben, DTCC Product Development manager, noted, "Permitting settlement of these broker-to-broker commissions in the same manner as fund-to-broker commissions will streamline the process and provide the industry with a secure, automated and operationally efficient pipeline."

Currently, when there are two brokers involved in a fund transaction, fund companies pay commissions directly to the initiating broker/dealer by check or other non-automated methods. In this environment, payments are sometimes lost or issued incorrectly, processing and reconciliation can become costly, and compensation is frequently sent without supporting documentation.

With this enhancement, fund companies can now transmit payments through Commission Settlement directly to the broker/dealer acting as a retirement plan provider and/or record keeper, who will then use the service to send payments along to the initiating broker/dealer.

Bruce Harrington, vice president and director of Product Development at MFS Investment Management, and one of the early adopters, explained: "Within our 401(k) business, we offer funds – in addition to our proprietary funds – to broker/dealers who come to us because we have access to a broad range of fund investments. By stepping into the middle and using Commission Settlement to send out a rich set of data to accompany payments, we can provide a much-needed service to our business partners."

What makes this extension of Commission Settlement important, in addition to the obvious automation aspect, is what Harrington calls "equalization". For example, he said, "Funds pay different compensations, and on a customer statement that can be perceived as a conflict of interest in the eyes of a customer, especially if that person is holding shares in numerous fund families. It can create an impression that a financial advisor is directing more money toward one fund than another. And with increasing focus on fee disclosure and transparency, uniform compensation can make it easier to comply with requirements."

Gribben said the change to Commission Settlement would also provide initiating brokers with a breakdown of information that will help them more accurately track payments.

DTCC has scheduled a testing period in November of the new record layouts and functionality. The enhancement is expected to launch in December. The service is provided by DTCC's National Securities Clearing Corporation (NSCC) subsidiary.

Commission Settlement has grown steadily in usage since 1992, when it was introduced. Three-quarters into 2005, usage was up significantly from the same time period in 2004, and is very close to matching year-end 2004 figures, when activity generally peaks.

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