Lieberman Urges Stronger Measure to Restore Investor Confidence in Mutual Funds

WASHINGTON – Governmental Affairs Committee Chairman Joe Lieberman, D-Conn., Tuesday commended House passage of a bill requiring greater safeguards for mutual fund investors but he said more far-reaching measures were necessary to curb abuses and restore investor confidence in the industry.

Reacting to House passage of the Mutual Funds Integrity and Fee Transparency Act (H.R. 2420), Lieberman praised provisions such as those requiring appointment of a chief compliance officer who would report directly to the independent members of the Board of Directors; stronger audit committees composed of independent directors; and greater disclosure of the incentives that brokers receive when selling specific mutual funds to investors.

“These are important steps on the path toward comprehensive reform,” Lieberman said. “But more must be done to assure mutual fund investors that their trust has not been misplaced. Mutual funds must be responsive to shareholders, and the best ways to do that is to strengthen mutual fund governance and make fees and costs more easily understood.”

Lieberman advocated additional measures, such as a requirement that the chairman of a fund’s board of directors be independent; that investors be informed of the actual fees they are paying in their quarterly or monthly statements (not just the fees they would pay on a hypothetical investment); that investors be provided with clearly understood information comparing their fund fees with the fees of similar funds; and that the Securities and Exchange Commission examine investor understanding of fund advertisements.

Some of these proposals are contained in the Mutual Fund Transparency Act of 2003 (S. 1822), introduced by Senator Daniel Akaka, D-Hi., and co-sponsored by Lieberman, and in reform proposals announced by Senators Chris Dodd, D-Conn,. and Jon Corzine, D-N.J.

Lieberman also advocates a hard 4:00 p.m. trading deadline to curb late-trading abuses. The House bill would continue to allow brokers to send orders after 4:00 p.m. to mutual funds if they had procedures to certify that those orders were received before 4:00 p.m.

Lieberman advocates improvements in SEC inspection and examination procedures to help the agency to uncover abuses in the future, as well as an Office of the Investor at the SEC to champion the interests of small investors. In addition, the Mutual Fund Transparency Act calls for a study of the costs and benefits of a separate Mutual Fund Oversight Board to provide additional oversight.

“Much as the SEC was caught asleep at the switch before the Enron scandal broke, abuses in the mutual fund industry went virtually undetected by the chief federal watchdog,” Lieberman said. “I’m pleased to see Chairman Donaldson proposed a number of reforms Tuesday, as this SEC history does not inspire trust in the procedures now in place.”

As Governmental Affairs Committee Chairman in 2002, Lieberman examined the conflicts of interest of Wall Street analysts pushing Enron stock, and the failure of government overseers to catch Enron’s many abuses. The 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. The SEC’s failure to detect mutual fund industry abuses is reminiscent of the agency’s failure to catch onto Enron Corp.’s deceptions.