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Fund Times: Waddell & Reed to Pay $77 Million in Settlement

Plus, news on Washington Mutual, Comerica, Vanguard, Fidelity, and more.

Morningstar Analysts, 07/31/2006

Waddell & Reed was hit with a $77 million tab to settle market-timing charges from regulators at the SEC, the New York attorney general's office, and the Kanas securities commissioner. The firm will pay $52 million in fines plus an additional $25 million in fee reductions to be spread out over five years.

According to the settlement, Waddell & Reed permitted market-timing in its funds going back as far as 1996 right up until September 2003 when Eliot Spitzer announced his probe into the practice. The settlement documents say that Waddell & Reed was more direct than most of the firms in the scandal in that it simply charged additional fees for market-timing space rather than quid pro quo sticky money deals: "The Timing Agreements required the Fee Paying Timers to pay W&R or W&R Services a fee ranging from 25 to 100 basis points on the timing assets, purportedly as payment for services."

Waddell & Reed received $3.6 million in fees from three market-timers who in turn netted a profit of $8.2 million, according to settlement documents. They also state that Waddell set limits on the percent of the total fund assets for which the timers could account, but that the timers were able to exceed those limits.

In addition, the documents say Waddell & Reed International Growth UNCGX was the most frequent target of the timing and the most profitable for the timers presumably because of time zone arbitrage. It said that at one point one market-timer had $40 million, or more than 5% of the fund's total assets. From March 2001 through September 2003, timers netted a profit of $11.7 million, according to the documents.

The agreement also requires that the fund board employ a consultant who will negotiate advisory fees at arms length to the firm. Another unusual aspect of the settlement is that it does not name any of the people at the firm who were responsible for the timing--nor did it require any to leave the firm.

Jennison Emerging Growth to Change Names
Jennison U.S. Emerging Growth Fund
's PEEAX board has approved a name change effective December 31. The new name, Jennison Mid-Cap Growth Fund, reflects the fact that Jennison has toned down the fund's aggressive strategy.

Washington Mutual and Comerica to Sell Fund Business
Washington Mutual
WM said it plans to sell its fund management arm, WM Advisors, along with its distribution and shareholder services business lines in a supplement to its prospectuses dated July 19, 2006. The sale comes as part of an overall restructuring plan at the company geared toward refocusing its primary retail-banking business. While no buyer has yet been identified, and any sale would be subject to approval by the funds' board of directors and shareholders, the firm said it expected a deal to be done by the end of the year. The WM group of funds comprises 21 distinct equity and fixed-income retail offerings totaling roughly $29 billion in assets as of June 30, 2006.

Also on the block is Comerica CMA owned Munder Capital Management, advisor to the Munder family of funds. The Detroit-based bank is reportedly involved in negotiations with Crestview Partners, a New York private-equity fund, in what looks to be in part a management buyout deal. Munder managed roughly $41 billion in assets as of the end of June, though only about $7 billion of that was in its 20-odd retail mutual funds.

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