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Congressional Hearings Set for Mutual Funds

November 03, 2003|From Times Wire Services

Momentum is building in Congress behind long-stalled efforts to legislate reforms in the mutual fund business, in the wake of the scandal tarnishing the $7-trillion industry.

Three public hearings on mutual funds are set for this week in the Senate and the House, with testimony expected today from New York Atty. Gen. Eliot Spitzer and the chief enforcer for the Securities and Exchange Commission, Stephen Cutler.

Bipartisan support is said to be emerging in the House to expand a fund reform bill from Rep. Richard H. Baker (R-La.), which cleared committee in July but failed to reach the House floor in the face of industry opposition.

The bill would require funds to disclose more about the fees they charge, the pay of their fund managers, and certain of their portfolio trading practices

The bill also would require that two-thirds of fund directors be independent and would put more power and responsibility on the audit committees of fund boards.

Congressional aides said the bill could be widened to tackle the alleged market-timing and late-trading abuses at the heart of the current scandal.

"It needs to be evaluated in light of recent enforcement actions and that's part of what the hearings are about," said Peggy Peterson, spokeswoman for the House Financial Services Committee and its chairman, Ohio Republican Michael Oxley.

Meanwhile, several Prudential Securities brokers who were asked to resign in September over allegations of improper mutual fund trading will face civil charges from Massachusetts securities regulators, Daniel M. Rabinovitz, a lawyer for the brokers, told Bloomberg News on Sunday.

Massachusetts Secretary of the Commonwealth William Galvin is expected to file charges this week accusing some of the five brokers of making short-term fund trades. The former Boston branch manager, Robert Shannon, also expects to be charged for failing to supervise the brokers' activity, according to Steven Fuller, a lawyer for Shannon.

"These brokers strongly believe that at all times they complied with the mutual funds' rules and regulations," Rabinovitz said Sunday. "Their business practices were well-known by their employers' top management personnel, and they believe that they were completely forthright with the mutual funds regarding their clients' goals and expected trading activity."

In Congress, this week's hearings may pit Spitzer against the SEC. Spitzer has lashed out at the federal agency for what he calls its failure to detect fund abuses and act quickly.

A Senate Governmental Affairs subcommittee kicks off the hearings today with witnesses that include Spitzer, Baker, Cutler and the SEC's top mutual funds overseer, Paul Roye. The House holds hearings Tuesday and Thursday.

On Sunday, in an interview with the Associated Press, Spitzer said fund companies must be forced to pay back to investors the hefty fees received for managing funds during the time they allowed trading abuses to occur.

"If they're expecting to get settlements [with regulators], they're going to have to give much more back than just [investors'] losses," he said. "They're going to be paying stiff fines and giving back their management fees. They violated their trust with the American investor."

Management fees by mutual fund companies totaled more than $50 billion last year, he said.

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