Spitzer is looking to force mutual funds to lower fees

High charges are linked to industry's scandals, he tells Senate panel

January 28, 2004|By Paul Adams | Paul Adams,SUN STAFF

In defense of his hard-line tactics against mutual fund industry abuses, New York Attorney General Eliot Spitzer told a Senate panel yesterday that he will force more mutual fund companies to lower their fees as part of settlement cases, a controversial approach that has prompted some regulators to charge him with overstepping his bounds.

Spitzer, whose probe of the industry has revealed widespread abuses, said high fees are linked with the late-trading and market-timing scandals that rocked the industry last fall. Defending his hard-line stance, he pointed to figures showing that mutual fund investors paid $50 billion in advisory fees and $20 billion in assorted other management fees in 2002.

"Improper trading and exorbitant fees are both a consequence of a desire by managers to enrich themselves at the expense of investors and an inability or unwillingness on the part of directors to protect investors," Spitzer said.

Lawmakers and federal regulators are studying competing proposals to curb trading abuses and make fees in the $7.2 trillion mutual fund industry more transparent to shareholders.

Lawmakers in the House and Senate have held a series of hearings in recent weeks on trading abuses and the Senate is considering legislation that would overhaul the industry. The House passed similar legislation in November.

A Senate Governmental Affairs subcommittee heard testimony yesterday from industry officials, academics and a pair of whistleblowers who have helped regulators expose trading scandals at two fund companies.

One whistleblower, Peter T. Scannell, testified for more than an hour about how his complaints about market-timing abuses at Boston-based Putnam Investments were dismissed by his superiors.

He was later assaulted by someone he believes was a member of the Boilermakers union, whose participants were accused of improper trading in a union retirement fund managed by Putnam.

Though Scannell was initially rebuffed by SEC officials in Boston, his complaints later helped regulators file civil charges against Putnam.

The former Putnam employee has been on disability since the assault.

"The mutual fund industry is indeed the world's largest skimming operation - a $7 trillion trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation's household, college and retirement savings," said Sen. Peter G. Fitzgerald, the Illinois Republican who heads the subcommittee and is within days of introducing a bill that would impose new rules on the industry.

While the Securities and Exchange Commission and Congress debate how to improve disclosure to investors, Spitzer has gone a step further by directly taking on fund-management fees.

In order to settle lawsuits with Spitzer, Alliance Capital Management Holding LP agreed to lower its management fees by $350 million over five years. The deal was criticized by top officials at the SEC, which historically has punished firms engaged in improper behavior by imposing fines.

"These actions have led some to accuse me of rate-setting," Spitzer said. "That is simply wrong. Requiring mutual funds to return investors' money that should never have been taken from them is not rate-setting. It's what regulators across the country do every day when they uncover evidence that consumers have been ripped off, and it's what I will continue to do as I uncover more evidence that mutual fund investors have been overcharged."

Putnam, the nation's sixth-largest mutual fund company, said yesterday that it will clarify and lower its fees as part of an effort to restore investor confidence.

The company was accused by state and federal regulators of allowing certain large customers to engage in improper trading that hurt returns for small investors. Billions of dollars have flowed out of Putnam funds in the wake of the scandal.

Spitzer has accused Putnam and other fund companies of charging small mutual fund investors significantly higher fees than those charged to large institutional investors. In 2002, he said, Putnam charged institutional investors 40 percent less than its other customers. Had small investors been charged at the same rate, they would have saved $279 million less in fees, Spitzer said.

Similarly, Alliance customers would have paid $200 million less had they been charged the same as the firm's institutional investors. Spitzer called on lawmakers to level the playing field for small investors.

"If mutual fund customers were charged the lower rate for advisory fees paid by institutional investors, they would save more than $10 billion a year," Spitzer said.

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