Oppenheimer Funds CEO Jon Fossel and former Van Kampen Investments CEO Don Powell – both former chairmen of the Investment Company Institute (ICI), the Washington-based lobbyists for the US mutual fund industry – have joined the debate about how to reform the mutual fund business in the wake of the current scandal.
The two men have outlined a number of measures to eliminate the risk of further scandals and restore the public trust. They include the abolition of soft commissioning of research, greater disclosure of returns, cuts in marketing costs, and higher early redemption charges to discourage rapid trading of funds. “It is time to speak out,” Fossel said in a telephone interview. “We have to keep short-term traders out of mutual funds because they cost long-term investors money.”
Fossel and Powell called soft dollar payments “a pervasive evil that confounds every effort to curtail their many abuses …Soft dollar payments are nothing but the use of shareholder assets to pay for ‘research’ that advisors decline to pay for out of their own pockets.” They also called for quarterly disclosures of after-tax fund returns, regular disclosure of portfolio holdings in excess of 1 per cent, a 4 per cent fee on stock fund redemptions made within ten days of purchase, a ban on directed commissions, and the establishment of company rules to prevent conflicts of interest arising within mutual fund firms managing other types of investments such as pensions, hedge funds and private accounts. They called for “disclosure to mutual fund directors all other accounts managed by each mutual fund portfolio manager and all holdings, transactions and investment performance of the other accounts. “Fossel and Powell said fund companies should follow the code of ethics issued from the ICI, which requires all senior executives, portfolio managers and analysts to pre-clear all trades and regularly disclose all personal holdings in funds connected to their company.
“Since the opportunity for conflict between management and the fund shareholders in IPO allocations, front-running, etc., is considerable, full and timely disclosure is appropriate,” they said. “Annual prospectus disclosure is not adequate.”
They say at least two-thirds of every fund board should be independent, and that compensation structures be disclosed to shareholders. Fossel said it was unacceptable that the assets and profitability of the mutual funds industry had increased dramatically but costs to shareholders typically had not decreased. He said that mutual funds should, where possible, keep the prices of their underlying securities up to date by adopting the “fair value pricing” valuation method to limit opportunities for rapid traders. “The trouble is that it (fair value pricing) can never be perfect,” said Fossel.