tells its investors to look for ethical or shareholder-friendly companies that lead the way in quality and corporate governance measures. Morningstar analysts say big fund companies like American, Vanguard, T. Rowe Price, and Fidelity have done an outstanding job in those areas. Unfortunately, there is no way to predict which fund will be implicated with wrongdoing next. Barron H. Harvey, Ph.D., dean of the Howard University School of Business, says, “Investors have a major obligation to do their homework.” SEC Chairman William H. Donaldson says the “Commission is moving swiftly and aggressively to take all necessary steps to protect mutual fund investors from abusive and harmful activity.”
In an attempt to remedy the situation, in December the SEC backed new rules intended to curb mutual fund abuses. The rules require mutual funds to restrict orders to a 4 p.m. EST deadline; to disclose market-timing policies and company procedures for determining the fair value of securities; and to appoint a chief compliance officer to make sure all rules are followed. Forde says it’s going to take tough enforcement and very strict regulations by the SEC in order to restore trust to mutual fund companies.
So f
ar, Bank of America and Janus have pledged to pay restitution to mutual fund shareholders. Canary settled with the New York attorney general for $40 million. Morgan Stanley has agreed to pay $50 million to settle federal charges of mutual fund abuses. Spitzer doesn’t feel that that’s enough and has vowed to seek criminal charges against certain individuals implicated in the scandal. Stay tuned.
Before You Leave Your Fund
If you have investments with companies that have been named in the widening mutual fund trading scandals, financial advisors urge you to exercise caution before you move your funds. There is no telling which fund may be charged with wrongdoing next, and you could lose more by taking your money out of a fund if you don’t pay attention to the following:
Taxes: If you are invested through a retirement account, don’t worry. If you’re not, you’ll owe up to 15% in capital gains taxes for any gains made in 2003.
Sales charges: Moving between funds in the same mutual fund family won’t cost you, but if you move to a different fund family, there will likely be a fee.
Redemption fees: Many funds charge redemption fees if you leave before a specified number of years. These penalties can be as high as 6%, much more than any investor has lost in the current scandals.