But limits on fund managers and directors won't take effect soon. The Senate has competing reform bills.
By Associated Press
Published November 20, 2003
WASHINGTON - The House moved Wednesday to reassure investors over the widening mutual fund scandal, overwhelmingly adopting legislation that would set new penalties for abuses and provide investors with more information.
The 418-2 vote came with industry problems spreading, more big-name companies cited for allowing special trading deals that disadvantage ordinary investors and a money stampede continuing out of tainted funds. Lawmakers approved the measure after only light debate.
The legislation would impose penalties against fund trading abuses, make directors on company boards more independent of fund managers and require companies to disclose more information to investors about fees and fund operations.
It still needs approval by the Senate, where several different versions have been proposed. No action is expected before next year.
The White House said the bill "highlights key areas of reform" that the Securities and Exchange Commission chief has committed to addressing. The Bush administration pledged to work with Congress on "prudent steps to protect" mutual fund investors.
Many of the bill's provisions direct the SEC to make changes, notably regarding disclosure of fund fees.
The House acted ahead of the SEC, which plans to make changes in how fund companies govern themselves and other areas through new rules it will consider in coming months.
Lawmakers of both parties rose in House debate to assure the 95-million Americans who invest in mutual funds - half of all households - that the legislation would help them.
A middle class staple, mutual funds often are a principal vehicle for retirement savings and college funds and are traditionally regarded as safe investments.
Democrats complained that the bill is incomplete because it does not strengthen the enforcement powers of the SEC and state securities regulators, yet they voted unanimously for the measure.
Federal Reserve chairman Alan Greenspan and Treasury Secretary John Snow have cautioned Congress against passing mutual fund reforms that could cost investors more in fees and diminished returns.
The issues raised could become sticking points in the Senate.
"More must be done to assure mutual fund investors that their trust has not been misplaced," said Sen. Joseph Lieberman, D-Conn., a co-sponsor of one of the Senate proposals.
Even the principal author of the House measure, Rep. Richard Baker, R-La., said further changes are needed so the president gets "the strongest possible reform bill."
The scandals have exposed "pervasive financial fraud by all segments of the fund industry," including some trusted companies, said Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee.
The aim of the measure, said Baker, was to "help bring the bright light of truth into fund fees, clean up the way funds are managed, and eliminate the conflicts of interest and utter disregard of duty to mutual fund investors that plague this industry."
The bill would prohibit short-term trading by fund insiders, a practice under scrutiny in many of the recent cases.
The quick trades, known as market timing, aren't illegal, but most funds don't allow them because they skim profits from longer-term shareholders.
Consumers Union, which frequently has criticized actions by the Republican-led House, said passage was an important first step toward industry reform and investor protection.
The two "no" votes were by conservative Reps. Ron Paul, R-Texas, and Jeff Flake, R-Ariz.
Meanwhile, the Miami Herald reports that the list of 16 mutual fund companies that paid millions of dollars to Morgan Stanley to push their products includes some of the most recognizable names in the industry.
Morgan Stanley agreed to pay a $50-million penalty to the SEC and to review its fund sales practices, as well as to make disclosures to its customers, to settle cases by the SEC and the National Association of Securities Dealers.
Fidelity Investments, the biggest mutual fund company, as well as AIM, Alliance Capital, American Funds, BlackRock, Davis, Dreyfus, Eaton Vance, Evergreen, Franklin Templeton, MFS, Morgan Stanley Funds, PIMCO, Putnam, Scudder and Van Kampen all paid for "distribution" or to get "greater access" to Morgan Stanley financial advisers, who in turn picked mutual funds for their customers, the Herald said.
Now those funds will face increased government scrutiny for what many say is a common industry practice.
The SEC is "looking into whether the companies have any liability in connection with their participation in the (Morgan Stanley) Partners Program," said SEC assistant district administrator Elaine Greenberg in the SEC's Philadelphia office in a telephone interview Wednesday.
She declined to name which companies the SEC is investigating.
Also, Putnam Investments was fired Wednesday by the Oregon Investment Council from managing $495-million of international stocks, joining at least 10 other public pensions that have dropped the firm since it was charged last month with securities fraud.
More than $8.7-billion of assets have been withdrawn from Putnam by public pension funds in 11 states since Oct. 28 when the money manager became the first fund company charged in the investigation of improper trading practices.
