Mutual Fund Shakedown

Congratulations Wisconsin! Once again, our state is the big red one, first place in socking it to people trying to save for retirement.

In the last biennial budget, Governor Doyle requested the state legislature to approve increasing the fees paid by mutual fund companies selling funds to Wisconsin residents. The legislature saw the governor’s increases and raised him.

The state’s Department of Financial Institutions (DFI) charges mutual funds a fee for every registration of securities statement and notice of filing. DFI also charges mutual funds an annual filing fee at based upon the dollar amount of securities sold by the mutual fund to Wisconsin residents. The fees are supposed to pay for the operation of DFI, specifically the Securities Division that oversees the mutual funds’ registrations and collects the fees.

Prior to the current budget, the fee for every registration of securities statement and notice of filing was $750, and the annual filing fee had a minimum of $150 and a maximum of $1,500.  As of July 1, 2009, the registration fee was increased to $1,500, a 100% increase, and the annual filing fee was increased to a minimum fee of $750 and a maximum of $15,000, a 1,000% increase.

The 1,000% increase in the maximum filling fee makes Wisconsin number one in the country for states that have a set filing fee.

Of course, like many other segregated fees in Wisconsin, the money is not solely being used for the purpose it is collected. DFI has a budget of $16.4 million in 2009-2010. The Securities Division of DFI, which collects the fee, only has a budget of $2.9 million in 2009-2010. In 2010-2011, the budgets are $16.5 million and $2.9 million.

The state will collect from mutual fund companies $24.4 million each year. The rest of the money is “lapsed” over to the general fund to help pay for the rest of state government spending.

In other words, the state charges fees over eight times the cost to run the agency collecting the fees.  The fees could even cover the expenses for the entire DFI with plenty of money still sloshing over into the general fund.

The DFI as a whole is a cash cow for the state, lapsing $48.8 million this year and $48.7 million next year into the state’s general fund.

DFI understands its role pretty well in the state budget process. When it laid out the different budget options for legislators to consider when increasing the fees on mutual funds, it said in the report,

“Others might suggest that a fee increase should only be imposed if the resultant program revenues were to be used for the purposes for which the fee exists. The administration has not indicated that this would be the case and all revenues generated through this fee increase would be lapsed to the general fund.”

Making matters worse, the state is increasing these mutual fund fees even though the state has no substantive jurisdiction over mutual funds. That is left to the federal government, and has been since 1996. Wisconsin is only responsible for administrating the mutual fund notice filings, and even then lacks the authority to substantially review them. Since 1996, Wisconsin has not brought one enforcement action against a mutual fund company.

So the fees are not really fees at all, but hidden taxes on mutual fund companies that are then passed along to the mutual fund investors as costs lowering their returns.

These investors are mostly individuals saving for their retirements. In 2008, forty-five percent of all American households owned mutual funds. For 76% of those households, the primary goal for owning the funds was saving for retirement.

Not only are these fees passed along to the investors by the mutual fund companies in the form of decreased returns, in some cases mutual fund companies may not even offer some funds to Wisconsin investors because the fees may make those funds unprofitable to offer.

Yet the state of Wisconsin is looking at people saving for retirement and seeing them as the state’s piggy bank to drain with a hidden tax on their investments. And Wisconsin is the best at it.

Sometimes being number one is not a good thing.

By James Wigderson
Special Perspective for the MacIver Institute