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| Visions & Revisions |
Mutual Antipathy
Debra Ryono
07/01/2004
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Mutual fund investors are at the mercy of their fund managers’ view of their
fiduciary duty.
A fund director’s fiduciary duty has no teeth, and boards accordingly
provide little or no protection for investors against fraud. We need legislation
imposing a general fiduciary duty on fund directors to ensure that the funds
they oversee could be a reasonable investment alternative, that the fees charged
are reasonable, and that the funds’ affiliates are not abusing their
relationship with the fund.
| The light at the end of the tunnel appears to be an oncoming train. Reform is
politically driven. |
For 34 years, the SEC has abdicated its statutory
duty to prosecute funds and directors for excessive fees. Section 36(b) of the
Investment Company Act, which was passed in 1970, provides that a fund director
and fund manager shall have a fiduciary duty with respect to the fees charged by
the fund manager, and tasks the commission with bringing actions against
directors and fund managers who violate this duty. But the commission has never
brought a case for excessive fees. The Mutual Fund Oversight Board would remedy
this failure by promulgating and enforcing minimum standards of conduct.
Information about fees and conflicts of interest is available to investors,
but they do not adequately understand it.
In what sense is information “available” if it is not understood? The
concept of full disclosure must consider whether the disclosure is actually
effective, and there is substantial evidence that, for large numbers of
investors, disclosure rules are worse than ineffective—they are misleading.
Consider, for example, the disclosure of outsized fund returns in fund ads in
the late 1990s, which encouraged investors to chase short-term returns and led
to substantial losses from 2000 to 2002. The SEC has done little to crack down
on this abuse. Improved investor education and a stronger sense of individual
responsibility are primary components for America’s financial security, but the
SEC also has a responsibility to ensure that investors have the information they
need to invest wisely.
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