How to Account for Commission Recapture Program Rebates

Posted by admin on Apr 29, 2014 3:02:08 PM

Commission recapture occurs when a fund enters into an agreement with an institutional broker to rebate a portion of trading commissions directly to a fund. How does commission recapture work?

An advisor executes their security trades through a broker with whom they have a recapture agreement, and the broker will rebate the agreed upon portion of the commissions either in cash to the fund or as payments for services for the fund.

Many of our clients who participate in commission recapture programs come to us with questions on how to properly account for the rebate. The answer depends on the mechanics of how the commission is being rebated to the fund. There are generally two methods brokers use to rebate commissions to the fund.

  • The first method is simply to rebate the commission in the form of cash back to the fund.
  • The second method is for the broker to allow the rebated commissions to build up as a credit. Once the credit grows to a meaningful amount, the broker will then, at the direction of the investment advisor, pay the expenses of the fund directly to the fund vendors. For example, the advisor may instruct the broker to pay custody fees directly to the fund’s custodian and to charge the payment against the fund’s credit balance for commission recapture rebates.

If the rebate is paid directly to the contractors for expenses incurred by the fund, the fund would still need to record the expenses paid by the broker with an offsetting entry to a fees paid indirectly contra-expense account. If the fund has an expense limit, the expense limit of the fund would be effectively reduced by the fees paid indirectly. For example, if the broker paid fees equaling 0.01% of net assets on behalf of the fund, and the fund had an expense limit of 1.25%, the expense limit would be reduced to 1.24% to ensure that the fund receives the benefit of the commission recapture program.

If cash is received directly by the fund, the cash should be recorded as an adjustment to realized and unrealized gain loss depending on whether or not the security that the commission relates to has been sold.

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