Congress Takes Aim at Manager Disclosure
The mutual fund industry may be about to lose a long-cherished privacy veil.
The House and the Senate are set to take up bills that would force fund managers to publicly disclose the stakes they have in their own funds and to report when they buy or sell shares in the portfolios.
With its image battered by the widening fund trading scandal, the industry is expected to drop what had been vehement opposition to the idea of managers having to reveal their personal stakes in funds they direct.
Craig Tyle, general counsel at the Investment Company Institute, the funds’ chief trade group, said the disclosure proposal was “an idea whose time may have come.”
The industry has been racked for more than two months by revelations of improper “market timing” trades, including by fund portfolio managers and other insiders. Such rapid-fire trading tactics can be used to take advantage of temporary market inefficiencies or to bet on short-term market moves.
Although timing isn’t illegal, it can raise fund portfolio costs and effectively skim profits from long-term shareholders.
Most fund companies officially discourage market timing -- which is why it struck a nerve with regulators, Congress and the public that managers at Putnam Investments, Strong Capital Management Inc. and other fund firms had been permitted to engage in the practice.
To crack down on improper timing by fund insiders, a bill introduced by Democratic Sens. Jon Corzine of New Jersey and Christopher J. Dodd of Connecticut would require a portfolio manager to immediately report to the Securities and Exchange Commission any trades in shares of the fund the manager oversees, said Corzine spokesman David Wald.
Executives of public companies have long been required to file reports with the SEC whenever they buy or sell their companies’ shares. That rule hasn’t applied to mutual fund managers with regard to their personal fund holdings.
The fund industry has argued that managers’ personal finances are their own business. As recently as last month, the Investment Company Institute proposed dealing with the trading issue by asking members to amend their codes of ethics.
Some analysts say that if the industry had consented years ago to the manager disclosure, it could have avoided the taint of insider self-dealing that is one of the most disturbing elements of the scandal.
Putnam has fired two managers over timing trades, and the firm last week agreed to settle SEC fraud charges over the managers’ activities.
At Strong Capital, company founder Richard S. Strong is under investigation for his timing trades in recent years. New York Atty. Gen. Eliot Spitzer has said Strong could face criminal charges.
Richard Strong has said he did not believe that his trades had been disruptive to the funds.
“But do you think Dick Strong would have been trading like this if he knew it would have become part of the public record?” said Don Phillips, a principal at fund tracker Morningstar Inc. in Chicago.
In the House, which has taken the lead on mutual fund reforms, a bill that passed the Financial Services Committee in July would require that fund managers disclose their stakes in portfolios they manage.
As the House prepares to take up the bill, Rep. Michael G. Oxley (R-Ohio) has added an amendment that would prohibit a fund manager from engaging in short-term trading in his company’s funds -- with “short-term” to be defined by the SEC.
Lori Richards, the SEC’s chief compliance officer, said that even in the absence of congressional action the agency was planning to take up the issue of fund insiders’ trade reporting.
