The Need for Reform
The mutual fund industry is in need
of fundamental reform. Pervasive fraud was able to flourish
at mutual funds because, among other reasons, those charged with guarding investors' interests -
the so-called "gatekeepers", such as funds' boards of directors - suffered from disabling
conflicts of interest. A majority of the mutual fund families at the core of the mutual fund
litigation that been investigated by governmental regulators have paid over $2 billion
dollars as a result of the market timing and late trading activities that they allowed
to flourish. Mutual fund boards have typically operated as nothing more than a rubber
stamp for the investment adviser that managed the funds' assets. Because mutual funds, corporations
in their own right, do not have a staff or employees, the funds hire an investment adviser, which
is almost always a corporate sibling (or captive) of the fund itself. Indeed, it is not uncommon
to find as much as 60% of a mutual fund's board composed of either insiders or board members of
the investment adviser. Moreover, insiders have a strangle hold on not just individual funds but
the entire fund family and its dealings with the investment adviser. For instance, each of the
mutual funds in the Invesco family of funds has hired Invesco Funds Group, Inc. as its investment
adviser. Even more disturbing is the fact that Fidelity Investment's Chief Executive and Chairman,
Edward Johnson, is the Chairman of the "independent boards" of 266 Fidelity Funds.
This incestuous relationship results in
ineffective governance and exorbitant costs. In 2002
alone, separate and apart from the trading and transaction costs discussed above, mutual funds
paid advisory fees of more than $50 billion and other management fees of nearly $20 billion.
The reality is that the majority of board members had every incentive
not to negotiate the best fees because they personally profited from those excessive fee arrangements.
