Regarding the mutual fund industry scrutiny going on, you can access testimony from the hearing entitled “Mutual Funds: Trading Practices and Abuses that Harm Investors” held yesterday by the Senate Committee on Governmental Affairs at this link. The Wall Street Journal reports on the hearing: “Regulators Testify to Abuses
In Mutual-Fund Arena.” (Subscription required.) The article states that “securities regulators are planning to bring enforcement actions against about two dozen brokerage firms for overcharging customers who bought large amounts of mutual-fund shares.” Quote of Note: “In conducting recent checks, the Securities and Exchange Commission said it found that 25% of brokerage firms allowed clients to place potentially illegal “late” orders for mutual-fund shares and that three fund companies appeared to have arrangements that allowed such late trading. In addition, the SEC said that about 30% of the brokerage firms may have actively assisted some investors in conducting improper trading.”
Today, a hearing entitled “Mutual Funds: Who’s Looking Out for Investors?” is being held by the House Committee on Financial Services:
- Press Release on the Hearing is here.
- Today’s prepared testimony is here.
- You can actually listen to today’s hearing at this link. (Scroll down, on the left under “Capital Markets.”)
Also, the 401khelpcenter.com has a very helpful article entitled “Recapping the Mutual Fund Scandal Fund by Fund” for those looking for information regarding the different funds involved in the mutual fund scrutiny.
The LAtimes.com is reporting in this article–“Senate Banking Panel to Examine Fund Abuses“–that the Senate Banking Committee will also hold a hearing tentatively set for November 13th.
The Wall Street Journal today has this article: “Weighing the Alternatives For Frazzled Fund Investors.” Another good article that someone should write is: “Weighing the Alternatives for Frazzled ERISA Plan Fiduciaries.” A law firm has tried to do just that in their article: “What ERISA Fiduciaries Should Do About the Mutual Funds Investigation.” The article drew my attention to remarks made by Assistant Secretary Ann L. Combs before the Annual Conference of The National Defined Contribution Council where she stated:
And as you know, another front has been opened in the war against fraud. New York Attorney General Eliot Spitzer and the SEC have recently launched investigations into alleged late trading and market timing by mutual funds.I recognize that the practice of short-term trading is discouraged by mutual funds, but in certain cases, the fund managers have overlooked or agreed to short-term trading by certain investors in return for investments that would increase their fees.
How do these allegations impact defined contribution plans? Market timing would disadvantage long-term investors, including 401(k) plans, by increasing fund administrative expenses. The problem with late trading is obvious – it’s illegal. What should plan fiduciaries do in light of the allegations?
ERISA requires that plan investment decisions, including the selection of mutual funds, must be prudent and solely in the interest of the plan’s participants and beneficiaries.
Allegations of improper mutual fund practices where a plan is invested must be factored into the fiduciary’s determination of the continuing appropriateness of that investment. The plan fiduciary may need to contact the mutual fund’s management for information regarding the trading practices and take appropriate action.
We expect that fiduciaries will be attentive to activities that materially affect the plan’s investment in the mutual fund or expose the plan to additional risk. Therefore, plan fiduciaries should have more active communication with mutual fund management in order to meet their obligations under ERISA.
Fiduciaries may also ultimately have to decide whether and how to participate in lawsuits or settlements arising from improper mutual fund activities. Of course, a plan fiduciary must weigh the cost of participating in a lawsuit against the likelihood and amount of potential recovery.
Perhaps one of the beneficial side effects of the unfortunate spate of corporate fraud and mutual fund investigations is a renewed emphasis on good corporate governance and good plan governance. I hope that the issues raised by Enron and similar cases have focused corporate officials on the important role fiduciaries play in protecting plan participants and has provided a necessary wake up call for people to take their fiduciary responsibilities seriously. In the long run, a renewed focus on fiduciary responsibility will benefit us all.