Mutual Funds Bill is a Good Beginning

By U.S. Rep. Wm. Lacy Clay. Member of Congress

  Last week, the U.S. House of Representatives passed 418 to 2, a measure that takes a step toward further protecting American investors in the mutual funds trade. It improves transparency relating to the fees and costs that mutual fund investors incur and improves corporate governance of mutual funds.

  In the face of a mutual funds scandal, this bi-partisan effort speaks volumes for our willingness to work to protect the wealth of Americans. Still, more needs to be done to ensure that small investors are protected and not used to help finance unethical investor schemes.

  While the scandal in the mutual fund industry is a new story, it is the same story we have heard again and again in society. It is the story of the absence of a moral code of corporate conduct. It is the story of bottom line profits at any cost. It is all about making the rich richer at the expense of the middle class. It is about the denial of accountability and the breech of trust.

  Investor outrage is justified. Mutual fund investors must have an equal opportunity for profit and an equal opportunity for risk. Unbelievably, this has not been the case.

  The American people have some $7 trillion invested in mutual funds. Some 95 million Americans, or half of all American families, have placed their trust in mutual funds. Mutual funds are the main investment and savings vehicle for middle-class Americans. They believe that they will be treated fairly and that the mutual fund industry is fair and that the federal government regulators act to prevent corruption. They have faith, even when reports of abuses in the mutual fund industry reflect a corporate culture that is deplorable and out of control.

  State investigative agencies have found that some mutual fund companies have violated anti-fraud statutes and given certain well connected investors special investment privileges while passing on the costs of these special privileges to the average investor.

  It is quite apparent that self-policing and limited government oversight in the mutual fund industry has failed. Instead, unsettling practices of deceit, breach of duty and trust, and blatant violations of ethics have hurt investors, shortchanging them by millions of dollars.

  Some mutual fund employees have helped wealthy clients evade mutual fund companies rules against a short-term strategy called market trimming. And while this practice is not necessarily illegal, most funds discourage the practice because it dilutes profits and increases the costs for ordinary long-term investors.

  Essentially, the overall lack of accountability to investors needs to be reversed.

  The bill that passed the House, HR 2420, is an important effort to respond to the problems mutual fund investors are facing. It would help ensure the independence of fund board members and audit committees, improve the disclosures of fund fees and expenses, and make board members accountable for overseeing soft dollar arrangements.

  This bill requires the Securities and Exchange Commission to study soft dollar arrangements and other disclosure issues to prevent funds from restricting share redemption and require mutual funds to hire compliance officers.

  Passage of the mutual fund regulation bill is a good thing. It is vitally necessary to ensure that the regulation of mutual funds is consistent with the level of financial investment.

  And while not all of the constituents in the 1st Congressional District can afford to invest in mutual funds, I anticipate that more and more will one day be in a position to build their wealth through investments such as these.

  When that day comes it is my hope that legislation like this will be in place to better protect your money and have it work for you and your future, as it should.

  (You are welcomed to write Congressman Clay at www.house.gov/clay/.)