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| 2003
News and Press Releases |
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HEADLINE:
Our Ethical Erosion
By: Arthur Levitt Jr. and Richard C. Breeden
The Wall Street Journal. December 3, 2003
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EXCERPT: From the neighborhood flea market to the New York Stock Exchange, markets rely, more than anything else, on trust. Market participants must trust -- and be able to verify -- that the goods offered are what they are supposed to be; that their offer is being considered without prejudice; that their orders are being processed fairly; and that the market isn't rigged to their disadvantage. Since Enron filed for bankruptcy two years ago this week, it has become clear that investors' trust was taken for granted and abused not just in one company or one sector, but across the breadth of our market system. High standards of integrity and character seem to have slipped to dangerous lows at many firms. Recently, investors have learned that this ethical erosion also has infected the mutual-fund industry, apparently to a widespread degree. For 95 million mutual-fund investors, mutual funds represent the best vehicle for these individuals to access our markets and to build wealth to send their children to college, buy a new home and save for retirement. Yet, the mutual-fund industry has taken advantage of the attractiveness of mutual funds to ordinary investors: -- Investors are misled into buying funds based on past performance, even where that record actually may be very poor. -- Investors are left in the dark about the level of most fees, and about the effect that fees, expenses, sales loads and trading costs have on their actual investment returns. -- Fund directors either are stretched too thin, or are otherwise uninterested or unable to exercise effective oversight. -- Most shockingly, fund management in many instances has offered pricing and trading prerogatives to hedge funds and other large investors, with some sponsors indirectly sharing in the profits from improper trading practices. Deals of this kind, at best, turn individual investors into second-class citizens, and, at worst, into sheep to be fleeced. Apparently, $80 billion in annual fees is enough to induce a bad case of ethical myopia. The time has come for a real clean-up. Cosmetic policy changes and compliance reviews or image campaigns won't do it. The mutual fund industry's reach and its importance to the livelihoods of millions of Americans demand not just singular enforcement actions, but a much broader overhaul of the industry itself. Anything less than swift, comprehensive action risks causing long-term damage to an investment vehicle that is important to the industry, to our markets, and to our economy as a whole.
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