Mutual Fund Hearing
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KWAME HOLMAN: Members of the Senate Governmental Affairs Committee wanted to know why officials from the Securities and Exchange Commission did not find out about the abuses sooner. Maine Republican Susan Collins:
SEN. SUSAN COLLINS: I question why the Securities and Exchange Commission, which has regulatory responsibility for the mutual funds and their broker dealers, has failed to detect these practices, to impose appropriate restrictions, or to penalize those who appear to be misusing their investors’ money.
KWAME HOLMAN: Stephen Cutler is director of enforcement at the SEC.
STEPHEN CUTLER: We are working aggressively on behalf of America’s investors to ferret out and punish wrongdoers wherever they may appear in our securities markets, including the mutual fund area. At the same time the committee is can look backwards to punish past misconduct, the commission has been involved in a comprehensive response to prevent problems of this kind from occurring in the first place.
KWAME HOLMAN: Cutler told the committee that one quarter of the nation’s largest brokerage houses helped clients illegally trade mutual funds after hours. Illinois Republican Peter Fitzgerald followed up that testimony.
SEN. PETER FITZGERALD: You’ve found that 25 percent of the brokers are allowing late trading, is that correct?
STEPHEN CUTLER: First, let me again emphasize that these are preliminary findings, and certainly more follow-up is going to happen. But indeed, more than a quarter of the responding brokerage firms reported that they are aware that they received 4 p.m. prices for orders placed after or confirmed after 4 p.m.
SEN. PETER FITZGERALD: And late trading is a violation of the law?
STEPHEN CUTLER: Yes, it is, senator.
KWAME HOLMAN: New York State Attorney General Eliot Spitzer testified about his own investigation, and he warned mutual fund companies that any gains made as a result of illegal behavior will be seized, and fees collected during that time will be returned to shareholders.
ELIOT SPITZER: In addition to full disgorgement and restitution to shareholders, there will need to be a disgorgement of all — and I repeat the word “all” — fees that were earned with respect to any fund during the period of time during which there was illegal behavior. There is absolutely no room for the receipt of fees during the period of time during which funds are violating a clear fiduciary duty. This number will be big. It will impose pain, and it should.
KWAME HOLMAN: Spitzer said it is not only mutual fund CEOs who are responsible for abuses; boards of directors are also to blame. And he said guidelines for board membership must be revised. Senator Collins picked up on that point, directing her question toward Paul Roye, an SEC official.
SEN. SUSAN COLLINS: There are in fact fund family directors who serve on the boards for 80 or even 90 different funds, which seems too many to me. The chairman of Bank America’s nation’s fund sits on the boards of 85 funds. The chairman at Janus sits on 113 fund boards. Now, I realize that many of the funds have similar structures and approaches, so there may be some economies of scale if you will, but it’s hard for me to see how anyone — any one director could effectively monitor the activities of so many different entities. Is the SEC taking a look at this area as far as issuing guidelines to limit the number of boards that a director can sit on within the same family of funds?
PAUL ROYE: We have certain authorities where we can act, and indeed, as I outlined how we had the rulemaking, tried to require a majority of independent directors, self-nominating directors, independent legal counsel. When we advanced issues like that, the rulemaking, there were people who told us that we were exceeding our authority to do that. So this might be an area where we may need some legislative help in terms of addressing an issue like you outlined.
KWAME HOLMAN: In closing, New York Attorney General Spitzer reiterated his willingness to work closely with the SEC, an institution he recently has criticized for failing to discover mutual fund abuses sooner.
ELIOT SPITZER: I do not regret or withdraw my comments or my feeling that we collectively as prosecutors and regulators should have done better. However, we will continue. We have absolutely no difficulty cooperating in entirety with the SEC. We will work hand and glove with them as we go forward. They are, must be, and will continue to be the primary regulator of the securities markets.
KWAME HOLMAN: Congressional probes into mutual fund abuses continue this week as both Spitzer and the SEC’s Cutler testify again tomorrow in front of the House Financial Services Committee.