Alliance, one of the nation’s largest publicly traded mutual-fund companies, is offering the fee cuts as part of a proposed settlement with New York Attorney General Eliot Spitzer’s office, as part of its ongoing investigation into the trading practices at mutual-fund companies. However, the investigation has not been focused on whether or not Alliance’s fees are reasonable, but rather on the improper trading that was allowed to take place, and how it affected the average fund holders.
This discrepancy between investigation and settlement talks is seen in the US Securities and Exchange Commission’s (SEC) approach to its own talks with Alliance, arguing that the fees issue should be handled separately.
Fees could be a possible approach to negotiation because although many mutual-fund companies have said they would repay investors for the losses they may have incurred through the market timing actions, there has been no discussion over how or when those payments will take place. Wednesday, Connecticut state Treasurer Denis Nappier’s decided to keep Putnam Investments as the manager of some international assets in the state’s penion funds, as long as Putnam waives $225,000 in fees. Putnam also agreed to link all fees to be paid by the Connecticut pension fund directly to the firm’s investment performance through March 2004 (see CT Agrees To Retain Putnam For a Reduced Fee).
The mutual fund industry has been rocked by allegations of market timing, which involves the quick buying and selling of mutual fund shares to profit from stale prices. More than two dozen financial firms are being investigated in the ongoing investigation. The practice is not illegal, but many funds have policies barring it because it reduces a fund’s performance. Ongoing trading probes have also uncovered allegations of late trading as well.
Alliance, which is majority-owned by AXA Financial, the US unit of French insurer AXA, has admitted to allowing market timing in an undisclosed number of US stock funds, although it was contrary to their anti-timing policies. Last month the company announced the departures of John Carifa and Michael Laughlin at the firm’s request, because of their involvement with “inappropriate” market timing including some transactions that hurt the company’s fund shareholders (see Alliance Capital Execs Forced Out by Trading Scandal ). Carifa was president, chief operating officer, and director of Alliance Capital, and chairman of the board of its mutual funds. Laughlin was chairman of Alliance Capital’s mutual fund distribution unit. Gerald Lieberman became director of Alliance Capital and the firm’s chief operating officer and Marc Mayer assumes leadership of Alliance Capital’s mutual-fund business.
Since New York Attorney General Eliot Spitzer filed a series of allegations involving several mutual fund companies on September 3 (see Spitzer Fund Abuse Probe Pumps Out More Subpoenas ), a number of mutual fund executives have been handed pink slips, including Bank One (see Bank One Fund Unit Head Departs ), Putnam (see Market Timing Leads to “Late” Departure of Putnam Fund Managers ), Strong (see Trading Probes Muscle Out Strong, Putnam Chiefs ), and Pilgrim Baxter (see Pilgrim Baxter Founders Resign ), as well as retirement plan trustee/custodian Security Trust Company (see More Heads Roll at Security Trust , STC Ex-Execs Hit With Criminal Charges; Regulators Force Dissolution).