Each day seems to bring more news from the mutual fund industry. And industry reform is in the air. The climate is such that on Capitol Hill today even the mutual fund industry’s lobbying group had to eat some crow. “I am appalled by the circumstances that caused you to convene this hear,” said Matt Fink, president of the Investment Company Institute to the United States Senate Committee on Banking, Housing and Urban Affairs. “Like you—and the constituents you serve—I am outraged by the shocking betrayal of trust exhibited by some in the mutual fund industry.”
SEC chief William Donaldson also spoke to the Senate Committee today, reading a Mutual Fund Investors’ Rights, which includes a call on brokers to more specifically disclose “revenue sharing arrangements, differential compensation for proprietary funds and other incentives such as commission business for brokers to sell fund shares that may not be readily apparent to fund investors.”
A mutual fund company executive whom we spoke to today noted that mutual fund regulation is indeed “evolving” and on many fronts. Take the issue of “directed trades”—the practice of directing mutual fund trades to brokerage firms whose brokers bring in new business to the fund. MFS Investment Management, around since 1924, is will no longer direct commissions, the New York Times reported today. MFS declined to comment, stating that it doesn’t talk about business relationships. Sources told The New York Times that MFS instituted a 90-day moratorium on the practice, ostensibly to make sure regulators don’t decide in the near future that the practice, considered common among mutual fund companies, is worthy of inquiry. And directed trades are common industry practice.
Still, the implication was clear: Anything that even resembles a conflict of interest in the mutual fund industry could be fair game. No doubt, other fund companies will follow, since regulators now are inclined to view the commissions paid to brokerage firms by funds as fund assets. As such, the fund should seek the best price (although one fund executive groused that there is more to “best execution” than just price.)
In other mutual fund news, Morgan Stanley late Monday agreed to a $50 million payment—covering both fines and restitution to investors—to settle charges that the firm abused clients by not disclosing that the firm’s brokers received higher commissions on some favored funds rather than others. Morgan was also accused of recommending inappropriate, but more profitable, fund shares to clients even though other shares would have been cheaper for the client. The firm said in a statement that it expressed “regret” over the charges.
Also, on Tuesday, Fed chairman Alan Greenspan and Treasure Secretary John Snow warned, in a letter to Congress, that even though regulations might be necessary, Congress should be careful not to burden investors, saying regulations “should be designed to provide investors with real value rather than serve mainly to increase costs and decrease returns.”