Lieberman Asks for Stricter Rules Against Mutual Funds Conflicts of Interest

WASHINGTON – Describing as too timid regulatory attempts to stem abuses by brokers selling mutual funds, Governmental Affairs Committee Ranking Member Joe Lieberman, D-Conn., Wednesday called on the Securities and Exchange Commission to ban mutual fund payola outright.

The SEC announced Tuesday it had found that mutual fund companies regularly paid brokerage firms to promote their funds to customers, often structuring the payments so they could be hidden from fund shareholders. On Wednesday, the SEC proposed rules that would require brokers to disclose when they had received such payments. NASD (formerly the National Association of Security Dealers) prohibits member brokerage firms from favoring mutual funds in exchange for more trades.

“The culture of greed that pervades Wall Street may benefit a lot of people but not the small investor,” Lieberman said. “I’m all for disclosure. But I’m more interested in fairness for the middle class investor.

“These latest revelations are yet another slap in the face to the millions of average investors simply trying to bolster their retirement accounts or college education funds.

“They thought their brokers were working for them by recommending investments based on fund performance. And they thought their mutual funds were working for them by choosing brokers for good service at low cost. It turns out many brokers and fund companies are only working for themselves.”

The practice by many mutual funds of paying brokers who put funds on preferred lists has long been an open secret on Wall Street. Lieberman said the SEC has done the right thing by finally addressing the problem, although he questioned why it took the agency so long and why they didn’t go further.

“The SEC needs to meet these unconscionable abuses head on,” Lieberman said. “Requiring yet another disclosure that ordinary investors may not read or understand is no remedy. The most egregious conflicts of interest must be banned. That’s the only way to ensure that the interests of investors are put first.”

The SEC also proposed new rules that would require the chairman and 75% of the members of a mutual fund’s board of directors to be independent of the management of the fund. Lieberman has previously called for similar measures to be adopted and he has co-sponsored two Senate bills that include such provisions.