BISYS Group is inching closer to a settlement with the Securities and Exchange Commission over some rusty marketing and distribution agreements it has with a handful of its mutual fund services clients, although the exact nature of its transgressions remain unclear.

The 20-year-old outsourcing firm, which services more than two million shareholder accounts with $300 billion in assets under management, said in a statement last week it is now engaged in settlement discussions with the SEC on the matter, which was publicly disclosed earlier this year [see MME 04/25/05].

New York-based BISYS also took the opportunity to disclose that it would restate financial statements for the fiscal years ended June 30 in the years 2002, 2003 and 2004 and the quarters ended Sept. 30 and Dec. 31 in 2003 and 2004.

Unrelated to the investigation into BISYS' mutual fund services unit, the bookkeeping probe is not yet complete and is still subject to audit. But company officials think the restatement will reduce some previously reported revenues, operating earnings and net income in quarterly and annual periods prior to fiscal year 2004 and modestly increase those from 2004 and the first two quarters of 2005.

5% of Equity

BISYS expects the restatement to total 5% of equity, or about $40 million, analysts said.

The company's cash flow, which must sustain its health until BISYS can file the restatement paperwork and lift a self-imposed credit freeze, would not be impacted, officials said.

As of late last week, the restatement items were related to "accounting for certain costs associated with acquisitions of businesses; revenue recognition for new business acquisition and conversion services; accounting for real property leases; accounting for contractual obligations and other liabilities; and accounting for vendor rebates and other miscellaneous items," BISYS officials said.

"We are disappointed that this restatement is necessary," said Russ Fradin, president and CEO, BISYS, in a statement.

"However, based upon the results of the ongoing investigation to date, with the exception of the accounting for escalation clauses in leases, all of the transactions that are currently expected to be the subject of this restatement were initiated more than 18 months ago."

Excruciatingly Risk-Averse'

Carla N. Cooper, a research analyst with R.W. Baird in San Francisco, characterized the restatement as the result of an "excruciatingly risk-averse accounting environment," but also as "a minor negative" for those who would like to see BISYS management return full attention to its growth strategy.

"It tells us they're not there yet," she said.

It appears, however, that the SEC's investigation of BISYS' fund services unit is nearing a close. Company officials said it anticipates that the cost to bring the matter to resolution should not exceed $25 million.

Daniel Briggs, vice president of finance and investor relations at BISYS, said the cost estimate reflects the firm's "diligent and proactive" approach to the investigation. In other words, the firm opened its wallet to speed the probe to an outcome.

"The $25 million includes legal costs, so I don't think the [SEC] fine will be anywhere near that," Cooper noted, adding that the $25 million estimate includes spending BISYS used to "crank the investigation up and get through it" as quickly as possible.

Getting through the investigation quickly, however, has as much to do with BISYS' bottom line as it does public relations. Industry insiders have estimated that the SEC investigation has been costing BISYS several million dollars for every fiscal quarter it has dragged forward.

So, in that context, Cooper interprets the $25 million estimate favorably.

"Anytime the market gets quantification of a risk, it is welcome news, so we would view this as a positive."

Steve McGraw, CEO of the Atlanta-based consulting firm Compliance 360, characterized the estimation as a bargain.

"These days, only the true Luddites of the world are going to view fines and regulatory action as the price of doing business. My guess is that what they did was probably not a huge infraction, because they are a substantial company," he said.

Federal Regulators' Attention

Exactly what BISYS did to attract the attention of federal regulators probably won't be clear until the investigation, which is being conducted at the company's Los Angeles office, concludes.

The SEC has a standing order not to comment on ongoing investigations and BISYS' Briggs would only say that the company "is cooperating with the SEC as fully and completely as possible and looks forward to putting this investigation behind." He declined to offer a timeframe on the settlement.

Sources told MME shortly after news of the investigation broke, however, that the SEC was looking into a number of outdated agreements where BISYS would pick up the tab for various marketing and distribution costs associated with bank-managed mutual funds.

Industry Standards

What drew the SEC's ire is that the costs, which were bundled together, greatly exceeded today's accepted industry standard. A lack of investor disclosure over the agreements is also a concern.

It's additionally unclear which bank funds are involved, although Bank of New York indicated in its annual report earlier this year that it was cooperating with the SEC on an investigation into a third-party service provider that serves as the administrator and principal underwriter of its Hamilton Funds.

Marketing and distribution expenditures were the issue, the bank said. BISYS was not named in the filing, although recent news reports have pointed to BISYS as the third party.

BISYS isn't the only mutual fund service provider to be swept up in the recent scandal. Brookfield, Wis.-based outsourcer Fiserv recently settled market-timing allegations with SEC for $15 million.

And the Sidco unit of Oaks, Pa.-based SEI Investments has been caught in a market-timing wrangle of its own.

But the irony that BISYS - the industry's sixth-largest provider of back-office services and now a major supplier of compliance functions - is struggling through an accounting snafu and questionable revenue-sharing agreements isn't lost on anyone.

"Their competitors will have a field day with this," McGraw said.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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