Mutual fund traders target of crackdown

May 10, 1994|By David Conn | David Conn,Sun Staff Writer

The mutual fund industry moved yesterday to make it difficult for fund managers to profit personally from stock market trading.

A panel of the Investment Company Institute (ICI), the industry's trade group, issued a set of proposed guidelines aimed at eliminating conflicts of interest in the personal trading practices of fund managers and other key employees.

The proposed voluntary guidelines, which are expected to be adopted by the ICI's board of governors next month, are intended to shore up public credibility in an industry that manages more than $2 trillion of Americans' money.

That trust was shaken in January when Denver-based INVESCO Funds Group fired one of its respected fund managers because of improper trading in his personal account.

The fund manager, John Kaweske, also was a founding director of a small biotechnology firm. That firm owned most of TC company in which Mr. Kaweske's fund eventually invested $1.3 million.

In February, a month after Mr. Kaweske's firing, the ICI convened a six-member panel to create a set of guidelines aimed at preventing those types of conflicts, and a variety of others.

The proposals "are tangible evidence of this industry's commitment to protect and enhance the interests of the investing public," said Ronald P. Lynch, chairman of the advisory panel and managing partner of Lord Abbett & Co. in New York.

The guidelines would:

* Ban purchases by mutual fund employees of securities in an initial public offering (IPO).

* Place limits on investments in so-called private placements, which often precede IPOs.

* Require fund investment employees to give up any profits made from trading in the short term, defined as within 60 days.

* Impose mandatory "blackout periods" which would prevent fund employees from trading in a security at the same time as the fund. For fund managers, the blackout period would be seven days.

* Require preapproval for investment employees to serve as directors of publicly-traded companies.

* Generally enhance disclosure of all securities trading by fund employees, including required preclearance of all trades, annual disclosure of all personal holdings, and disclosure to investors of trading activities and procedures.

Most of the recommendations are not aimed exclusively at portfolio managers. They would also include analysts, traders and anyone else who might know about the investment activities of a mutual fund and be in a position to benefit personally from that knowledge.

"There are people in the industry who would think this is unnecessary, that we're only on this because the press has picked it up, and the Congress," said James S. Riepe, an advisory panel member, and a managing director of T. Rowe Price Associates Inc. in Baltimore.

"But our industry is one of trust -- that's all we have," Mr. Riepe said. "So the perception is the reality. It's tough to separate them."

The mutual fund industry since the 1970s has been required to operate under a code of ethics. But each company has been allowed to create its own specific code, as long as it serves the broad goal of preventing conflicts of interest.

"I think some managers will see [the recommendations] them as appropriate, and some will find them constraining," Mr. Riepe said. The ICI board of governors likely will vote on the proposals by mid-June.

Legg Mason Inc., which manages almost $4 billion in 14 mutual funds, supports and in fact already abides by most of the proposed guidelines, according to Talbot Daly, vice president and director of mutual fund marketing.

Still, he noted, a few of the suggestions sound a bit harsh, including an outright ban on investing in initial public offerings.

"If they banned trading in IPOs, gee, I personally worry that we are a capitalistic system," Mr. Daly said, "and you are denying somebody the right to buy something -- because of his position -- for his own account."

The ICI panel's guidelines are more specific than any previous requirements, and more restrictive than the codes most companies have adopted. But unless the Securities and Exchange Commission adopts the guidelines as regulations -- a move the panel specifically recommended against -- they would remain voluntary.

Barry Barbash, director of the SEC's investment management division, said it's unclear yet whether the SEC will adopt some or all of the ICI panel's rules.

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