With all the investigations into mutual fund malfeasance, members of the Investment Company Institute, at their general membership meeting this week, could be forgiven for, frankly, being tired of hearing about it all.
But in his speech to the conference, Paul Roye, the SEC’s director of its investment management division (and the Commission’s top dog on enforcement), delivered perhaps his strongest remarks yet on the controversial issue of revenue sharing.
“What was exposed was some fund executives and those who sell fund shares striking secret deals for favored customers—at the expense of average shareholders—in order to increase the profits of fund management companies and their own personal fortunes,” Roye said to the ICI General Membership Meeting in Washington, D.C. “This was reprehensible by any standard.”
Roye also spoke about the ethical responsibility of the industry overall and emphasized that the SEC is “just beginning to get aggressive” on mutual fund abuses like revenue sharing, market-timing and directed brokerage.
Revenue sharing is not illegal and involves mutual fund companies paying brokerages for selling their funds. It has been under the microscope of late, and firms as diverse as Edward Jones and Morgan Stanley—which paid out $50 million in November to settle its own revenue-sharing issues—have been accused of the accepting payments but failing to disclose them to their clients.
Of course, many claim that the disclosure rules before the scandal were vague, and that firms did fully disclose the relationships with the mutual funds. (Edward Jones maintains that relationships such as that were disclosed.) How the regulations will change is still up in the air, but Roye’s comments were the most pointed he—or any other regulator—has made so far.
In other scandal news, founder Richard Strong and Strong Capital Management, the fund manager that was found to be allowing certain hedge funds to market-time its funds while telling other investors it was not allowed, settled its case with the SEC by paying out a $140 million in “monetary remedies.”
In addition, Strong, who will pay $60 million of the fine himself, has been barred from the securities industry for life.
