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Mutual Fund Sales Notice Fees: Are a Handful of States Unconstitutionally Exacting $200 Million Each Year?

54 Pages Posted: 8 Oct 2012 Last revised: 31 Oct 2012

David M. Geffen

Ropes & Gray LLP

Date Written: October 29, 2012


As background, the article describes the political compromise struck in 1996 between Congress and state securities regulators. That year, Congress enacted the National Securities Markets Improvement Act of 1996 (NSMIA), which effected multiple changes to the federal securities laws to promote efficiency and capital formation by eliminating overlapping federal and state securities regulations.

With respect to mutual funds, NSMIA resolved the problem of overlapping regulation by preempting state substantive regulation and registration requirements of mutual funds, thereby providing for exclusive federal jurisdiction over the contents of a mutual fund’s prospectus and operation of each fund. NSMIA was welcomed by the mutual fund industry because it eliminated the “crazy quilt” of regulation that had made registration of mutual fund shares unnecessarily cumbersome — in some cases leading mutual funds to restrict their fund offerings to residents of certain states.

However, in order to secure the acquiescence of the states and secure NSMIA’s enactment, NSMIA preserved state authority to require mutual funds to file sales reports and to pay state filing fees based on those sales in connection with the sales reports. A handful of states have taken unfair advantage of this fee loophole.

Today, in six “Premium Fee States,” – Texas, Washington, Minnesota, Wisconsin, Nebraska and West Virginia – the notice filing fees paid by mutual funds are disproportionately greater than the notice filing fees paid by mutual funds to the remaining states. While the six states account for only 15% of the U.S. population, each year, these six states are paid approximately 50%, or approximately $200 million, of the total notice filing fees paid by mutual funds to all states.

The article examines the constitutional validity of the Premium Fee States’ disproportionate notice filing fees as state “regulatory fees” and as state taxes. It concludes that, regardless of whether these fees are deemed to be regulatory fees or taxes, the Premium Fee States’ notice filing fees are constitutionally invalid and, therefore, should be struck down.

The ramifications of striking down the Premium Fee States’ notice filing fees would be significant. Collectively, over the last three years, the Premium Fee States have unconstitutionally exacted approximately $600 million from mutual funds. These mutual funds and, therefore, the funds’ investors, may be able to recover roughly this amount from the Premium Fee States (or more, assuming a longer statute of limitations and the application of statutory interest). Prospectively, eliminating the annual $200 million unconstitutional exaction would be equivalent, in present value dollars, to a one-time savings by mutual funds and their investors of between $2 billion and $4 billion.

The article also examines a variety of issues that mutual funds’ advisers and boards of trustees/directors may want to consider in developing strategies to recover notice filing fees previously exacted unconstitutionally by the Premium Fee States, and to persuade the Premium Fee States to reduce their notice filing fees to adhere to constitutional requirements.

Keywords: mutual funds, NSMIA, state regulatory fees, state taxation, Commerce Clause, Due Process Clause, state taxes

Suggested Citation

Geffen, David M., Mutual Fund Sales Notice Fees: Are a Handful of States Unconstitutionally Exacting $200 Million Each Year? (October 29, 2012). Hastings Constitutional Law Quarterly, Vol. 40, No. 1, 2012. Available at SSRN:

David Geffen (Contact Author)

Ropes & Gray LLP

800 Boylston Street
Prudential Tower
Boston, MA 02199
United States

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