Senate Banking Panel to Examine Fund Abuses

Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) on Friday ordered the panel to launch an inquiry into trading abuses in the $7-trillion mutual fund industry, beginning with a hearing on the scandal in about two weeks.

“This is an issue that’s not going to be swept under the rug, can’t be swept under the rug, shouldn’t be swept under the rug,” Shelby said. “We don’t know how deep it’s going, but it seems to be fairly widespread.”

Shelby said he intended to call as witnesses New York Atty. Gen. Eliot Spitzer, who first leveled allegations of illegal mutual fund trading in September, and Securities and Exchange Commission Chairman William H. Donaldson, whose agency has come under criticism for lagging behind state regulators.

The Senate Banking Committee, which has jurisdiction over the securities industry, is the third congressional panel to announce plans for hearings on mutual fund trading abuses. The Senate Governmental Affairs subcommittee on financial management will hold a hearing Monday, and the House Financial Services subcommittee on capital markets will convene a hearing Tuesday.

The House panel Friday announced another hearing, with Massachusetts Secretary of the Commonwealth William Galvin as a witness, for Thursday. Shelby’s hearing is tentatively set for Nov. 13.

Mutual fund trading abuses also emerged as an issue on the presidential campaign trail. In New Hampshire, Sen. Joe Lieberman (D-Conn.), who is seeking his party’s presidential nomination in 2004, criticized the SEC for not catching violations and issued a plan to address abuses.

Lieberman called for an Office of the Investor at the SEC “to protect the interests of average investors.” He also proposed that at least two-thirds of directors on fund boards be independent and that investors be told more explicitly about fees.

In Washington, senators and House members said they weren’t sure what, if any, legislation might be needed to correct abuses in mutual funds, which hold investments from half of American households. Last year, Congress enacted the Sarbanes-Oxley corporate governance law in response to accounting scandals at Enron Corp., WorldCom Inc. and other companies.

“It’s premature to say we need a Sarbanes-Oxley approach” to reform the mutual fund industry, said Rep. Michael G. Oxley (R-Ohio), a coauthor of the Sarbanes-Oxley Act. Oxley, chairman of the House Financial Services Committee, said next week’s hearings “will help us through some of those issues.”

Rep. Richard H. Baker (R-La.), chairman of the House subcommittee that will hold Tuesday’s hearing, said he might want to expand the scope of a bill he introduced this year to require greater disclosure of mutual fund fees and limit conflicts of interest of fund managers.