Mutual-fund bill has familiar ring

House votes today on 3rd industry bid to limit investor suits

April 06, 2001|By Michael Dresser | Michael Dresser,SUN STAFF

Today is "Groundhog Day" in Annapolis.

That's because Senate Bill 264, which legislators have named after the Bill Murray movie in which time keeps starting over at the beginning of that day, is expected to come up for a final vote in the House of Delegates. Twice in the last four years, the General Assembly has passed the legislation, but the issue keeps popping up because of challenges in the courts.

Though the process might be comic, the issue is not. It involves the rights of tens of millions of mutual fund shareholders across the United States.

If the debate in the Senate last month is an indication, few lawmakers understand precisely how the bill affects their constituents who invest in mutual funds - even though many have voted for identical legislation twice before over the last four years.

What they do know is that the mutual fund industry wants it - a lot.

Proponents, led by Baltimore giant T. Rowe Price Group Inc., say it will eliminate a discrepancy between state and federal law caused by what they call a misguided judicial ruling.

Without the legislation, they say, mutual fund boards could be thrown into chaos as courts applied inconsistent standards in judging whether their members are independent.

But Mercer Bullard, a former federal securities official turned shareholders' rights advocate, said the legislation is an "indefensible abridgment" of the rights of mutual fund investors to sue managers whose conflicts of interest lead to devastating losses of retirement savings.

"As if the likelihood of winning a lawsuit against the manager of a mutual fund weren't slim enough already, Maryland is trying to make it virtually impossible," Bullard said.

Representatives of the nation's mutual industry say Bullard's fears are exaggerated. They contend that federal law will adequately protect investors, regardless of whether the House passes the bill, which has already passed the Senate.

"It was done to put the law back to where people thought it was originally," said Jeffrey Maletta, a lawyer for the Investment Company Institute, a trade group for the mutual fund industry.

The bill could have national repercussions because about a third of the nation's 7,500 mutual funds - representing trillions of dollars - are incorporated in Maryland. Federal courts and judges in other states often base their interpretations of shareholders' rights on the law of the state where funds are incorporated.

Bullard, who founded a shareholders' rights organization last year in Chevy Chase, says the bill could harm mutual fund investors by shielding from lawsuits managers whose board members have serious conflicts of interest.

The former assistant chief counsel for the Securities and Exchange Commission warned the House Economic Matters Committee in testimony March 28 that the bill would require the courts to treat directors as disinterested parties even in cases where the SEC refuses to recognize them as independent.

The bill essentially adopts the definition of independence included in a 1940 federal law. That law lays out a series of specific cases in which a director cannot be considered independent - for instance, if he is the father of a fund manager.

Critics of the federal law say it fails to cover many other relationships in which a director's independence can be compromised.

Bullard gave the example of an Internet fund that lost 79.1 percent of its value last year - one of the worst beatings suffered by a mutual fund in the history of the industry. The manager of the fund answers to a board of directors that includes his uncle.

Under federal law, Bullard said, the uncle can be considered an independent director.

That means that if a shareholder petitioned the fund to sue its manager, the uncle would be one of the people deciding the matter.

Despite Bullard's warning, the committee voted 18-1 to approve the bill Wednesday. It received preliminary approval in the House yesterday without a single question or a word of debate.

Advocates say the bill is needed to reverse the ruling of a New York federal judge who found that directors could be judged not to be independent if they serve on multiple boards and receive high compensation.

The ruling, which was based on Maryland law, sent shock waves through the mutual fund industry. Even Bullard said the decision was wrong, though he contended the industry's solution is "gross overreaching."

Maletta defended the legislation, denying that there is any significant gap between the protections for shareholders in state and federal law. He added that a shareholder whose petition for the fund to sue its manager is rejected can sue the directors.

If anything, Maletta said, the bill helps shareholders by protecting the rights of independent directors to serve on multiple boards within a fund group.

"You get a better managed fund group, and the directors are more knowledgeable," he said.

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