Five financial services firms will reimburse mutual funds a total of $7.5 million to compensate for years of overcharging performance fees. The fines are the end result of a sweep initiated by the Ft. Worth, Texas office of the SEC.

Dreyfus, Gartmore Mutual Fund Capital Trust, Kensington Investment Group, Numeric Investors and Putnam Investments all charged excessive fees and had to reimburse the impacted mutual funds, the SEC claims.

The law states that fund managers can charge performance-based fees provided that the fees are tied to the fund’s performance versus a stock index or other benchmark. The fee can rise when the fund’s returns exceed the benchmark, or fall when its returns lag.

None of the firms appeared to have overcharged deliberately, but simply used methodologies in calculating the fees that were not in sync with the SEC.

“We did not charge them with intentional fraud,” said Katherine Addleman, an enforcement officer at the Ft. Worth office of the SEC. “They [the firms] did fail to comply with the law.”

In addition to the amount they overcharged, the firms also will have to pay back interest based on the duration of the violations. For instance Dreyfus, whose violations occurred from July, 2000 to June of 2004, will pay $2.99 million in overcharges and more than $273,000 in interest.

Putnam had to pay the next most with slightly more than $1 million in overcharges and about $343,000 in interest. Its violations took place from April, 1997 to September, 2004. Numeric’s violations were from January, 2001 to August, 2004 and will pay back almost $920,000 in overcharges and $110,230 in interest.

Gartmore overcharged fund investors by about $632,000, and will pay an additional $21,665 in interest, while Kensington overcharged about $617,000 and must also pay $173,864 in interest. Gartmore’s violations took place from January, 2001 to August, 2004 and Kensington’s violations went from October, 2000 to December of 2004.

The case was the end result of a sweep that commenced two years ago after Bridgeway Capital Management and its president, John Montgomery, agreed to pay almost $5.2 million to settle SEC charges. In its original charge, the SEC said the firm calculated its performance fees based on the wrong asset levels, resulting in it overcharging investors. The case put a spotlight on performance-based mutual fund fees, and prompted the SEC’s Fort Worth, Texas, office to launch the investigation.

“As a result of that case, we took a look at the industry to determine if this was a larger problem,” Addleman said in a published interview. “These five enforcement cases are a result of that sweep.”

In her interview with CCH Wall Street, Addleman declined to comment if the sweep was continuing or if the SEC was looking at other firms for similar violations.

During the sweep, the five firms made changes to their policies that will prevent them from making the same mistakes in the future, Addleman said. The firms were quick to point out that the violations were not the result of deliberate actions by some in the firm.

“Putnam calculated the fees in good faith, but, like a number of other fund companies, we were unaware our methodology was not in strict accordance with SEC regulations,” said Nancy Fisher, a spokeswoman at Putnam in a published report. “We regret the error and have fully reimbursed the Putnam Research Fund.”

Patrice Kozlowski, a spokeswoman for Dreyfus echoed a similar sentiment.

By announcing the charges against these firms and explaining where they went wrong, Addleman is hoping that others will get the message and make changes to their systems in order to avoid enforcement actions from the SEC.

“The Commission hopes that it will make the industry more aware of the problems with performance fees,” she said.

Have a comment? Let us know what you think of this or another CCH Wall Street story by clicking here.