Mutual oversight

November 10, 2003

YOU KNOW those mutual funds into which you've been dutifully siphoning some of your paycheck week after week? Quick, what are their expense ratios - that is, what percentage of your investments do they gobble up every year to run the funds? How about their turnover rates - that is, what percentage of their portfolios do they sell in the course of a year?

If you can't answer these questions - or never even thought to inquire about them - you're likely among the vast majority of mutual-fund investors. Even as Americans have poured billions into these funds, often for retirement and college savings through workplace programs, they've typically paid little attention to such details.

And that's entirely understandable. The U.S. mutual fund industry - which grew from $134 billion invested in 1980 to about $7 trillion now - has seemed a bulwark of trust, particularly in contrast to the scandals bursting across corporate America in recent years. Of course, the industry has spent lavishly to create and maintain that image.

But these days, the nation's 95 million mutual-fund investors have plenty of reasons to be wary. Under the glare of investigations by New York, Massachusetts and the Securities and Exchange Commission, it turns out that many of these funds allowed late trading, insider trading and a variety of market-timing scams that favored big players and chipped away at the returns of not-so-favorably-positioned small investors.

The speed with which these accusations have moved from a handful of funds to a third or more of the industry's largest fund families is apt to leave the little guy just about ready to call it quits. In the case of at least a few companies, the corrupt practices have been so pervasive - and investor trust so breached - that selling off seems reasonable. Short of that, all investors ought to be taking a careful look at their funds' expenses and management.

But the scope of the problems coming to light in the mutual-fund industry exceeds mere caveat emptor. Sweeping structural reforms are in order, from the SEC down.

This newspaper previously has called for a greater representation of investor interests on fund company boards in the form of requiring a greater presence of independent board members. Last week, Sens. Daniel K. Akaka, a Democrat from Hawaii, Peter Fitzgerald, an Illinois Republican, and Joseph I. Lieberman, the Connecticut Democrat, introduced the Mutual Fund Transparency Act, which would require that 75 percent of fund board members be considered independent and would mandate greater disclosure of funds' brokerage commissions - both good ideas.

The proposed legislation also requires a study on the creation of a new mutual fund oversight board under the SEC. Some may view this as adding another layer of bureaucracy, but the size and complexity of the mutual-fund industry - and its critical role in retirement and college savings - make an oversight board well worth considering. Clearly, shareholders, fund boards and the SEC could use the added help in guiding fund managers to higher ground.

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