The body count is growing. Recently, the founders of Pilgrim Baxter & Associates (who ran the PBHG family of funds) were sacked for some pretty sleazy trading of their own mutual funds. Taken together with the departure of Richard Strong (of Strong Capital) and with the inappropriate trading found at the highbrow U.S. Trust (a unit of Schwab), the market timing/late trading scandals are really picking up speed now. Suddenly, it's not just the asset managers who might be taken down, but perhaps even you. Or at least someone you know — at Wachovia/Prudential in Boston, for instance.
Transactions that once looked like the indiscretion of a few rogues are now being exposed as standard business tools, perks used by mutual funds to attract big-ticket writers. Turns out that market timing (not illegal) and late trading (which is illegal) are pretty pervasive. Set aside the debate over the propriety of market timing (if a fund prospectus doesn't prohibit it, it's not necessarily improper). Likewise, set aside how much market timing and late trading combined actually cost retail investors (as we stated in last month's issue, this is no Enron in its effects on the average investor.) Still, there's evidence that it's an undesirable practice. Some fund managers, for instance, find market timing disruptive. Some evidence: Prudential Securities, which is now in hot water with both the SEC and the Commonwealth of Massachusetts, sent a memo to its sales staff in Nov. 2000 prohibiting them from market timing the firm's proprietary mutual funds.
In short, the scandal is fueled by a populist sensationalism, but it carries just enough real-world negatives to sustain it. Anyone hoping these problems would fade away should read the Q&A with Sen. Peter Fitzgerald (R-Ill.), who chairs a Senate subcommittee investigating mutual funds (page 20). Fitzgerald says the securities industry is guilty of price gouging and other improprieties and calls it the “world's largest skimming operation.” How will his opinion affect your day-to-day business? He and Sen. Daniel Akaka (D-HI) have introduced a bill that would “require a broker to disclose in writing, separately from a fund's prospectus or any SEC filing, compensation received or to be received from any source in connection with a customer's purchase of open-end fund shares.”
If you aren't already describing how you get paid, you might as well start. The best advisors I know are already disclosing fees in detail anyway.
We thank you for your support. Drop us a line with your comments at: 249 W. 17th St., New York, N.Y. 10011-5300. Or email us at [email protected]. Publisher Rich Santos can be reached at [email protected].
