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Alliance offers to cut fund fees by 20%

Alliance Capital Management is nearing separate settlements with federal and New York state regulators in an improper mutual fund trading case that could result in a payout of $600 million.
/ Source: The Associated Press

Alliance Capital Management is nearing separate settlements with federal and New York state regulators in an improper mutual fund trading case that could result in a payout of $600 million.

A source familiar with the matter said Tuesday that Alliance has finalized a deal with New York Attorney General Eliot Spitzer's office to pay a $250 million fine and to reduce management and other fees charged to investors by $350 million over five years to settle charges it allowed certain investors market time some of its funds.

The Securities and Exchange Commission, which is also investigating Alliance, had yet to sign a deal, but was close, said the source, who spoke on condition of anonymity. The source said a joint announcement of both settlements could come as early as this week.

CNBC reported Tueday that, as part of the settlement, Alliance Capital will also hire a senior officer in charge of keeping mutual fund fees in line. The officer would be required to either seek competitive bids for fund management or hire an independent third party to make certain fees are reasonable.

Spitzer's office declined to comment Tuesday, as did the SEC. A message left with Alliance was not immediately returned.

If the settlements are finalized, they would be the most high profile -- and expensive -- in what has turned into an industrywide scandal for the once pristine mutual fund industry.

State and federal regulators have issued dozens of subpoenas as part of investigations into illegal late trading after the market's close and market timing -- a type of in-and-out trading that is not illegal, but widely prohibited by many fund companies because it skims profits from long-term shareholders.

Regulators have said firms that officially restricted market timing but made selective exceptions committed fraud.

Formal accusations have been brought against Putnam Investments, Pilgrim Baxter & Associates and Prudential Securities, and many other fund companies have said they are facing possible charges -- including Alliance.

Alliance is one of the nation's largest money managers, with $456 billion in assets under management as of Nov. 30, primarily for pension funds and other institutional customers. The company also manages mutual funds, many under the AllianceBernstein brand, and owns money manager and research firm Sanford C. Bernstein.

Although Alliance as not been formally charged with any wrongdoing, it has acknowledged that market timing occurred, to the detriment of shareholders, and that there is a "high likelihood" that it will face sanctions and penalties. Last month, the company took a $190 million charge for restitution and litigation costs associated with its market timing activities

It also ousted John D. Carifa, president and chief operating officer, and Michael J. Laughlin, the chairman of Alliance Capital's mutual fund distribution unit. Carifa was also the chairman of the board of Alliance's mutual funds.

Spitzer had indicated that any settlement for improper fund trading would have to include restitution as well as return of management fees in some form. An agreement with Alliance that required a fine and lower fees would appear to satisfy those demands.

The SEC has been more reticent about what it expects, but historically has used settlements to enforce regulations, rather than create new policies.

Last month, the commission was harshly criticized by Massachusetts and New York state regulators for partially settling a fraud case against Putnam. The state regulators said the settlement, in which Putnam neither admitted nor denied wrongdoing, was inadequate.

(CNBC contributed to this report.)