Skip to Content
Fund Spy

A Road Map for Rehabilitating Scandalized Fund Shops

A better corporate culture is key to regaining investor trust.

We have recommended investors avoid in-house funds at  Bank of America (BAC),  Janus , Strong, and  Bank One . We did this because of the seriousness of the New York Attorney General's allegations and the fact that they strongly imply that fund shareholders' well-being came far down the list of priorities at these firms. These problems cannot be solved overnight. However, neither should the firms be put aside and forgotten about forever. They can, and should, reform themselves, at which point we will revise our opinion. In order to right their ships, the fund companies under investigation need to take the following steps.

First, we’d like to see a public apology and restitution for all fundholders who lost money to market-timers or late traders.

Second, those responsible for allowing late trading or market-timing should be cut loose. We’d rather see firms start fresh with people who were acting in fundholders’ interests before the investigation started rather than accepting promises to do better next time.

We’re encouraged to see that Bank of America is already cleaning house. By far the most serious violations of trust alleged by Attorney General Eliot Spitzer occurred at the firm’s Bank of America Asset Management. Three of the four people mentioned in the e-mail correspondence released by Spitzer have already exited, including president Rob Gordon.

Third, compliance systems should be beefed up to ensure that investors are being treated fairly and the prospectus is being followed in spirit and letter. They should patch holes in the system so that no one can get away with late trading or allowing any violation of a fund prospectus. The compliance effort should include the adoption of policies to reject all market-timing money that can be reasonably identified as such without exceptions.

In addition, we’d like to see increased use of tools that other firms use to keep timers out. Such measures include fair value pricing, redemption fees, and simply policing asset flows. We’d also like to hear whether there are cases in which redemption fees are waived or situations where timing would be allowed.

Finally, the corporate culture should be improved so that fundholders are returned to the top of the priorities list. New hires will be an important part of changing the culture, but also it should reflect a rededication of values from the top. Nations and Janus are both in the market for chief investment officers. They’ll be a crucial part of the process of setting corporate values and making sure the funds are run for fundholders, not salespeople. One would hope that they are given a strong mandate to eradicate any practices not in fundholders’ best interests.

Admittedly, judging corporate culture is more subjective, yet it gets right to the heart of whether you want to trust your life savings to a firm. These companies all had rules in place that were supposed to prevent such behavior, but people found a way around it. The bottom line is that all the measures in the world won't help unless the company's leadership and employees are dedicated to fund-shareholders' well-being, are scrupulously honest and forthright, and are firmly committed to following these rules instead of looking for ways around them. Just as important, people who don't fit this mold shouldn't be tolerated, no matter how much business they bring in. In short, each firm must make a clean break with the recent past and set a new course.

Sponsor Center