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News and Press Releases |
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HEADLINE:
Directors' Lapses Played Role In Funds Scandal
By: Rachel Beck - Associated Press
Seattle Post-Intelligencer. November 24, 2003
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EXCERPT: Directors of mutual funds have one primary role: to protect their shareholders. Yet, with many funds under investigation for improper trading, it appears board members didn't have a clue that any bad behavior was going on. And now, even with this scandal in full view, some boards aren't keeping investors as informed as they should be. In recent months, many of the nation's mutual funds have been accused of allowing select customers to use "market timing," or short-term, "in and out" trading of funds intended to be longer-term investments. Market timing is largely legal, but many funds prohibit it. Others allegedly participated in "late trading" -- an illegal practice of accepting buy and sell orders at the 4 p.m. price long after the market closes. It would be unrealistic to expect boards to monitor every trade at every fund, but the troubles hitting many of these firms aren't isolated, one-time events. So fund directors are on the hot seat for missing the wrongdoing. There's no telling exactly why these serious infractions were overlooked, but two possible reasons are conflict of interest and money. At Strong Mutual Funds, for instance, the board chairman had been Richard Strong, who resigned earlier this month amid multiple inquiries into his personal trading of the company's funds. He also served, and continues to do so, as a board member as well as chairman and CEO of Strong Capital Management, the investment adviser to Strong Mutual Funds. So whose interest did he put first: the shareholders or his company? There is also big money to be made as a mutual fund director. Each fund technically operates as its own company and therefore has its own board. But often the same board governs all the funds at a given company, which can mean the same directors are overseeing dozens of different funds. As Russel Kinnel, the director of fund analysis at Morningstar, points out, a salary in the thousands of dollars for each fund adds up to a mighty hefty paycheck -- one that may give a board member little incentive to seek out wrongdoing. "Some fund boards don't get who they are representing and don't have much motivation to represent," Kinnel said. "This system is set up for rubber stamping. Being on 50 boards can't do anyone justice." And it's not that boards didn't have the tools to uncover trouble.
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