ASSOCIATED PRESS
Federal regulators responded to the mutual fund scandal yesterday with proposals requiring ethics codes for investment firms that manage funds and bolstering the independence of fund board chairmen and directors.
At the same time, the Securities and Exchange Commission is widening its fund investigation by delving into several cases in which brokerage firms steered clients toward certain funds in exchange for payments — inadequately disclosed — from those fund companies.
As part of its package of reform proposals put out for public comment yesterday, the agency would require that fund investors be given more information about such arrangements, even before they buy funds.
The SEC’s inspection of brokerage houses that sell mutual funds has uncovered widespread payments to the brokerages from the firms that manage funds in return for favorable treatment of specific funds.
SEC officials say they are concerned that fund investors, who represent half of all U.S. households, aren’t being informed of the potential conflicts of interest such arrangements can bring.
Investors can be harmed by not knowing of such arrangements, as well as by being directed into higher-cost or worse-performing funds, the officials maintain.
Investors “deserve to know how much their broker stands to benefit from their purchase of a particular fund,” SEC Chairman William Donaldson said at the public meeting.
Mr. Donaldson told reporters the cleanup of the $7 trillion fund industry can’t be delayed while Congress deliberates. The House passed overhaul legislation in November nearly unanimously and the Senate is expected to act on its own version of such proposals this year.
“We have got to move as swiftly as we can,” Mr. Donaldson said.
The agency’s actions yesterday, in a series of votes by the five SEC commissioners, built on its tentative adoption last month of a rule imposing a cutoff of 4 p.m. Eastern time for pricing of fund shares to stem illegal after-hours trading. The proposals could be adopted formally after the SEC gathers public comment.
The SEC proposed the ethics codes for investment advisers, which would require employees of investment advisory firms to report their personal trading — including in any mutual funds managed by their firms.
Investment advisers are required by law to protect the interests of their clients, the mutual funds they manage, in what is called a fiduciary relationship. In one of the biggest mutual fund cases, investment adviser Alliance Capital Manage-ment last month agreed to a $600 million penalty to resolve regulators’ accusations of improper fund trading and violating its fiduciary duty.
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