The cost battle reveals the market influence of Wall Street utility company Broadridge

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Broadridge Financial Solutions Inc update

The cost of e-mail to send a large number of letters to investors was as high as 25 cents, which angered the executives of listed companies and mutual funds and brought attention to the power of Broadridge Financial Solutions, a little-known but lucrative utility company on Wall Street.

Broadridge is headquartered in the suburbs of Lake Success, New York, and has become a major third-party supplier that distributes prospectuses, shareholder reports, and agency materials on behalf of brokers, and handles more than 80% of the business. The company stated in a letter to the US Securities and Exchange Commission in 2018 that the email covered more than 140 million investor accounts.

According to its website, Broadridge “provides critical infrastructure to support investment.” However, critics say the price of its investor communication services is high.

“Except for Broadridge, no company of any size can do this. When we talk about monopolies, we are talking about real monopolies,” said Stradley Ronon Stevens & former director of the U.S. Securities and Exchange Commission and representing investment funds. Young lawyer David Grimm said.

Broadridge operates financial channels that most investors have never thought of. U.S. funds and listed companies must share important documents with investors. But because most investors hold shares through brokers, fund managers and companies often don’t know their identities.

Instead, brokers distribute investor newsletters—usually through the use of third-party providers such as Broadridge—and charge funds or companies.

Morningstar analyst Rajiv Bhatia said that in the investor communication business, “Broadridge is far ahead.” “Most of the stocks are kept in brokerage accounts. Broadridge owns every broker except [retail broker] Robin Hood. This is basically the entire market. ”

The New York Stock Exchange supervises investor communication fees, setting the upper limit of each report to 25 cents. According to analysts, Broadridge charges a full 25 cents for an email. According to the company, its cost is higher than paper mail because Broadridge charges a fee of 10 cents to review whether shareholders prefer e-mail to paper mail.

According to the Washington Fund Industry Trade Organization Investment Company Institute, these costs far exceed the cost. For investor accounts that are not held through a broker, a typical fund pays 5 cents to send shareholder reports via email or paper mail, excluding postage, ICI Said.

Individual US companies are also affected by document processing fees. Catalyst Pharmaceuticals, a Florida-based drugmaker, wrote in a letter to the US Securities and Exchange Commission this year that 96% of its shareholders hold shares through the use of Broadridge brokers. The company supported a change in the rules of the agency fee system after the “dramatic” increase in the number of its shareholders, so agency obligations also increased.

The campaign by mutual fund managers and US companies to cut the cost of regular investor communications has been fruitless. Last week, the US Securities and Exchange Commission rejected a proposal to transfer responsibility for regulatory fees from the New York Stock Exchange to the Financial Industry Regulatory Authority, an industry support agency. The New York Stock Exchange declined to comment.

Susan Olsen, ICI’s general counsel, said: “We are very disappointed that the SEC’s order failed to recognize that the current processing fee schedule was fundamentally broken.”

Fund managers such as Franklin Templeton and Federated Hermes will benefit from lower fees because they have difficulty accumulating assets under management in a low-cost boom Index investment. ICI estimates that “unreasonable expenses” total $220 per year.

ICI stated that brokers have little incentive to control fees because some brokers will receive undisclosed share of fees from investor communications providers in exchange for their business. Some fund executives stated that they are unwilling to resolve current fee arrangements with regulators because they fear that brokers may restrict the way their products are marketed to investors.

The automatic data processing company, a payroll company, was spun off from Broadridge in 2007. For the fiscal year ended June 30, Broadridge reported a record revenue of $5 billion and adjusted operating income of $902 million, equivalent to an operating profit margin of 18%. Most of the revenue and profits come from Broadridge’s “Investor Communication Solutions” business, which includes sending agent materials to investors. The company’s annual report stated, “We operate in a highly competitive industry.”

Broadridge declined to comment on its investor communication fees, and instead referred to the Financial Times in a letter it sent to the Securities and Exchange Commission in 2018. This letter concerns fees paid by investors using the funds of the broker (also known as the nominee). “Regardless of the level of fees paid by the fund to the nominees, the fees Broadridge charges its nominees are subject to competition restrictions. No nominee is required to sign with Broadridge,” the letter said.

Broadridge insists that its fees represent a significant savings in capital compared to the cost of communicating directly with investors who own stocks rather than through a broker. The letter also pointed out that Broadridge charged the fund $45 million in fees for the year ended April 2018 to maintain a database to understand whether investors chose to receive email or paper mail from their investments.

An employee collates paper reports to be shipped at the Broadridge printing plant. Companies charge higher fees for sending reports via email © Bloomberg

Today, Broadridge estimates that 84% of corporate agency services and approximately 75-80% of fund agency services are provided only via email.

People’s attention to Broadridge’s market share in investor communications has been increasing. In 2019, the Investor Advisory Committee of the U.S. Securities and Exchange Commission, a group of external experts, Published a report Said that regulators have strengthened the agency pipeline system, thus forming a natural monopoly. The report said: “This reduces the competitive pressure to improve cost-effective services.”

JPMorgan Chase analysts wrote, “Any potential changes to the rules surrounding agency allocation could affect Broadridge’s share and profitability.” However, after the US Securities and Exchange Commission made a decision last week, advocates of change lost their momentum.

“When you hear that shareholders are paying millions of dollars more than they need, this is a priority that the SEC deserves to work on,” Grimm said. “But the SEC has a a lot of things Worried, and there are only so many people, so many hours in a day. ”

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