Regulatory crossfire could
have unintended consequences
Like many of you, I have been surprised at the
breadthand apparent depthof the reach of the mutual fund
trading scandal. Oh sure, you can find some who swear they
saw it coming but, for the very most part, they are
Cassandras who make their living predicting either
financial doom or thievery. Sadly these days there remains
much to worry over.
Several months ago in this space, I said we deserved
better from those entrusted with our retirement
investments. If anything, the intervening months have only
cemented that sentiment in my mind. Yet, despite the
near-weekly revelations of some new act of real or alleged
malfeasance, I am finding little comfort from the
investigations.
Take, for example, the Securities and Exchange
Commission, the regulatory body that ostensibly keeps an
eye on mutual fund practices, but seems instead to have
been asleep at the switch. How else to account for how so
many for so long engaged in so many of these practices? The
alternative viewthat they were knowing, and complicit in
their acquiescenceis too horrifying to contemplate for
long. Then, finally roused from its slumbers, the SEC
imposes dollar fines that pale in comparison with the
profits alleged, while the culprits admit to nothing, but
promise never to do "it" again.
As if that weren't bad enough, the proposed "solution"
to the systemic problemhandcrafted by the Investment
Company Institute, a mutual fund trade groupessentially
treats the fund complexes as if they were Caesar's wife,
rather than part of the conspiracy. Not that the problems
exist at all funds, or that the problems at all funds are
of the same ilk, but the most heinous acts appear to have
been well within the funds' ability to control and/or
stophad they been so inclined. The problem is, they
weren't.
However ill-crafted and late those reactions may be,
consider the prosecutorial connect-the-dots game being
played by New York Attorney General Eliot Spitzer. Having
found evidence of late trading and market timing, Spitzer,
who is unabashedly public in his political ambitions,
tracks the source of the problem to the fund directors.
Whether they knew or not, they should have known, the
argument goesand I, for one, am not unwilling to go that
far. However, Spitzer now seems to be saying that, once
that door is opened, every facet of the mutual fund's
operation under the board's auspices is fair game for
inquiry.
This logic may well lead to a reduction in mutual fund
fees, which many would applaud, but it is an ill-gotten
"gain," IMHO. It also now seems that Mr. Spitzer would have
fund company boards actively entertain the notion of hiring
some firm other than the firm that sponsors the fund to
manage the money. That approach isn't inconsistent with how
those boards are supposed to think, mind you. Nor is it
different from how many fund families (notably the Vanguard
Group) currently operate. It seems, however, alien to how
most investors probably expect the funds to be managed.
More significantly, I'm not sure how Mr. Spitzer's market
timing investigation has opened the door so wide that he is
able to impose, through threat of prosecution, these types
of changes.
Ultimately, what concerns me most about the current
state of affairs is not what Mr. Spitzer, or his AG
brethren, are pursuing, or whether the SEC finally will
rise to the occasion. No, what troubles me most is watching
the two engage in what can perhaps best be described (in
polite company) as a "hissing" contest, quibbling over who
can impose the most appropriate sanctions.
No matter how well-intentioned, it's an arms race that
we'll all wind up paying for in the end.
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