June 22, 2005
Consumers who invest in mutual funds now have fewer protections against unfair manipulations, such as recent "market timing" episodes. A federal appeals court has struck down new Securities and Exchange Commission rules designed to make mutual fund boards more independent of the fund's managers.
The U.S. Court of Appeals for the District of Columbia didnt argue with the SECs authority to impose the rule. The rub came with the cost of actually implementing it. The court held that the regulatory agency had not investigated the rules cost to mutual funds or alternatives offered up by commissioners who voted against the new rule.
The disputed rule would have required that 75 percent of a funds directors be unaffiliated with the advisory company that manages the fund. It also stipulated that the funds chairman remain independent as well.
Consumer groups had lobbied for the rule, with some calling it a key protection for small shareholders. Barbara Roper, director of investor protection at the Consumer Federation of America, said she hoped the SEC would not abandoned the principle behind the rule. The court said the SEC would not have to redraft a rule that met the courts guidelines.
The winner in the case is the U.S. Chamber of Commerce, which sued the SEC to block implementation of the rule. Chamber Executive Vice President Stephen Bokat, said the group applauds the court's decision to stop regulatory overreach by the SEC."
Meanwhile, court cases continue, brought by small investors victimized by market timing, in which a mutual fund manger allows quick in-and-out investing to reap maximum profit. While the practice is legal, but funds dont allow it because it racks up expenses that can hurt long-term shareholders. Cases are now pending against Janus Capital Group, Putnam Investments, Strong Capital Management, Alliance Capital Holdings and other mutual fund companies.
