A follow-up proxy filed with regulators on Feb. 23 on behalf of Reserve Management of New York, the investment advisor to the Reserve Funds and Hallmark Funds group, reveals the true cost of the company’s error, discovered two years ago.
All told, Reserve is asking the current shareholders of four of its proprietary money funds, 12 single-state and one multi-state muni fund, to approve the fund manager’s retention of approximately $935 million in fees earned over a nearly 10-year period. That includes roughly $630 million in investment advisory fees, many of which date back to June 1997, and distribution fees of another $305 million. The lion’s share of those fees are from The Reserve Fund’s Primary Fund, which earned about $465 million in investment advisory fees and charged investors over $102 million in 12b-1 fees. The Reserve earned another $74 million from its U.S. Government Fund and racked up $18 million in distribution fees on that fund
In February 2005, Reserve first revealed its discovery that two of its fund board’s independent trustees who, along with the other board members, had periodically voted for the continuation of the fund group’s investment advisory contracts and distribution plans, were not legally “independent.” That status change rendered these management and distribution contracts void, necessitating current investors to bless new contracts and Reserve’s retention of past fees.
The Securities and Exchange Commission declined comment as to whether it would seek sanctions against Reserve related to these contract lapses.