SEC Action on Funds Faulted

From Times Wire Services

Congressional investigators have questioned the adequacy of inspections of mutual funds by the Securities and Exchange Commission, a few months after finding that the agency failed to uncover trading abuses throughout the fund industry that cost investors billions of dollars.

Congress’ Government Accountability Office, in a report released Monday by two House lawmakers, said that the SEC had fewer examiners covering the sprawling $8-trillion mutual fund industry than it should, and that funds deemed to be lower risk might not be inspected for 10 or more years.

A report issued by the office in April said the SEC’s inspectors should have detected the market-timing abuses before September 2003, when regulators began an industrywide crackdown after New York Atty. Gen. Eliot Spitzer exposed the violations.

That assessment brought a bipartisan attack on the agency by the chairman and the senior Democrat of the House Judiciary Committee.


This time it was two Democrats, Reps. Barney Frank of Massachusetts and Paul E. Kanjorski of Pennsylvania, who seized on the report to criticize the SEC, now under new leadership with Christopher Cox having left Congress to become its chairman this summer.

“This GAO report ... confirms my long-held suspicions: More can be done and more should be done to protect American investors,” Kanjorski said in a statement announcing the release of the study. “We need to ensure that the SEC’s oversight of the mutual fund industry is adequate to protect consumers’ investments and prevent abusive practices from developing again in the future.”

The SEC has shifted resources from routine inspections of mutual funds to so-called targeted examinations linked to specific risks, with comprehensive exams conducted only on funds considered to be high risk, the new report found.

The agency also is responsible for inspecting sales of mutual funds by brokerage firms, an area in which it has discovered undisclosed arrangements between fund companies and brokerages that create potential conflicts of interest.


Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations, has said the agency -- with a limited budget to police the fund industry -- had pursued issues that were believed to represent the biggest potential risks to investors.

“The SEC has taken steps to continually enhance its examination oversight,” agency spokesman John Nester said Monday. “Most importantly, the SEC is seeking to utilize its valuable, limited resources in the most effective manner by focusing on the activities and firms that pose the greatest risks of compliance failures that could harm investors. While the SEC can’t examine every firm, we’re seeking to maximize the efficiencies and benefits of our examination oversight.”

The agency has no way to track results of its fund inspections to detect general problems, and planning for inspections and their review by managers are weak, according to the report.

The GAO noted that the agency’s resources could be further strained after it begins regulation of the U.S. hedge fund industry in February.

Cox, in an interview with the Wall Street Journal, said he planned to implement the controversial rule establishing SEC supervision of the industry “exactly as adopted.”

The SEC division that oversees mutual funds and hedge funds is without a permanent head after the recent departure of Paul Roye.