20 Years After the Market-Timing Scandal, the Fund Industry Focuses on Transparency but Lacks Disclosure

On Sept. 3, 2003, then-New York Attorney General Eliot Spitzer announced he was investigating mutual fund companies for practices hurting small investors. The companies were allowing special clients to make rapid mutual fund trades, in violation of their prospectuses and at the expense of fund investors.

“[The mutual fund industry] was an industry that was largely scandal-free,” recalls Russ Kinnel, director of ratings for manager research, who was a Morningstar analyst at the time. “We knew enough to know that it wasn’t a pure industry that was without fault, but it was a surprise.”

It’s been 20 years since that story, which later became known simply as “the market-timing scandal,” broke.

The scandal sent shock waves through the industry, raising questions of how the SEC was regulating mutual funds, how the industry was exploiting fair value pricing, and if investors could really count on fund companies to be on their side.

Many of the Morningstar analysts who covered the scandal at the time are still with us today—including Kinnel, who wrote dozens of articles exploring the depth and breadth of the scandal. And Chief Executive Officer Kunal Kapoor, who was an analyst at the time, wrote Morningstar’s very first article on the Spitzer investigation. (Note that you’ll need access to Morningstar Research Portal to view Kapoor’s article.)

Analysts Reflect: 20 Years Later

With the wisdom of two decades on our side, what do we now know about what this meant for the industry?

In this episode of Investing Insights, Kinnel discusses the long-term effects of the market-timing scandal, the progress the industry has made since then, and more.

And for more perspective on the state of the industry 20 years later, dive into these insights from Kinnel, senior manager research analyst Gabriel Denis, director of parent research Bridget Hughes, and director of editorial for manager research Dan Culloton.

Market-Timing Scandal: From the Morningstar Archives

Our analysts sorted through the accusations, indictments, settlements, and regulatory remedies, withdrew recommendations from some implicated funds and firms, and offered advice to investors on the ones to avoid or consider selling.

For a closer look, check out this content from our archives.

You can also revisit managing director Don Phillips’ Congressional testimonies, which highlighted the strengths and shortcomings of the fund industry and the necessary steps to reforming it.

This article was compiled by Emelia Fredlick.