Lieberman Strafes SEC for Lax Oversight of Mutual Funds
Middle Class Investors’ Trust Abused all Over Again

WASHINGTON – In a sharply worded letter to Wall Street’s chief watchdog, Governmental Affairs Committee Ranking Member Joe Lieberman, D-Conn., Monday pointed to a “breakdown in the integrity of the mutual fund industry” and demanded the Securities and Exchange Commission explain how it managed to overlook widespread abuses. Recent revelations about improper trading practices at large mutual funds – coming close on the heels of corporate scandals that caused middle class investors to lose billions of dollars in retirement savings – once again are undermining investor confidence, not just in the markets, but in the regulatory structures set up to ensure fair play, Lieberman said.

“The looting has already begun; now we must prevent it from continuing,” he wrote to SEC Chairman William Donaldson. At issue this time, Lieberman said, is a “virtual avalanche of admissions” by mutual fund officials of unscrupulous practices, including “market-timing,” “late-trading,” favored treatment of large investors, and personal profit by fund officials at the expense of their customers. “…The SEC was far too late to the table in addressing these problems,” Lieberman wrote. “Now that the problems have come to light, I am once again left to wonder: why did the watchdogs fail to bark?” Ninety-five million Americans own shares in mutual funds with a total value of $6.8 trillion. Of that, $2.1 trillion is invested specifically for retirement. In the wake of a recent wave of corporate scandals, many experts advised middle class investors to turn to mutual funds, one of the more highly regulated investments available. Lieberman specifically asked the SEC why it failed to follow up on a tip it received in March 2003. And he asked the agency to reassure working families that their savings are safe and their trust in mutual funds and their directors is not misplaced. “Mutual fund investment is, for many Americans, the path to retirement,” Lieberman wrote. “These working families look to the SEC, as the main federal agency charged with watching over that industry, to make sure that their investments are handled honestly and transparently.” This is not the first time the SEC has been caught off guard by malfeasance on Wall Street. The agency failed to detect deeply engrained problems at Enron, as well as the deceptions of Wall Street analysts whose conflicts of interest led them to recommend worthless stock to unsuspecting investors. The Governmental Affairs Committee staff produced a report in October 2002 that charged the system of public and private financial watchdogs with “systemic and catastrophic failure” to protect investors from fraud and abuse. To ensure more accountability and openness in the mutual fund industry, Lieberman demanded to know the SEC’s plans regarding:

  • Implementing a strict time deadline for trades to arrive at the mutual fund
  • Strengthening the independence and effectiveness of mutual fund boards
  • Improving the SEC’s examinations of mutual funds to more effectively detect abuse
  • Requiring clearer disclosure of all fees, expenses, and other fund costs
  • The use of consumer research to make fund materials more understandable to the average investor. Below is a copy of the letter to Donaldson:
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