House OKs Mutual Fund Abuse Penalties
NewsMax.com/Wires, November 20, 2003
WASHINGTON -- The House moved Wednesday to reassure investors over the widening mutual fund scandal, overwhelmingly adopting legislation to mandate new penalties for abuses and provide investors with more information about fees.
The 418-2 vote came with industry problems spreading, more big-name companies cited for allowing special trading deals that disadvantage ordinary investors and a money stampede continuing out of tainted funds. Lawmakers approved the measure after only light debate.
The legislation would impose penalties against fund trading abuses, make directors on company boards more independent from fund managers and require companies to disclose more information to investors about fees and fund operations.
It still needs approval in the Senate, where several different versions have been proposed. No action is expected before next year.
The White House said the bill "highlights key areas of reform" that the Securities and Exchange Commission chief has committed to addressing. The Bush administration pledged to work with Congress on "prudent steps to protect" mutual fund investors.
Many of the bill's provisions direct the SEC to make changes, notably regarding disclosure of fund fees and other information.
The House acted ahead of the SEC, which plans to make changes in how fund companies govern themselves and other areas through new rules it will consider in coming months.
Lawmakers of both parties rose in House debate to assure the 95 million Americans who invest in mutual funds -- half of all households -- that the legislation would help them.
A middle class staple, mutual funds often are a principal vehicle for retirement savings and college funds and are traditionally regarded as safe investments.
Democrats complained that the bill is incomplete because it does not strengthen enforcement powers of the SEC and state securities regulators, yet they voted unanimously for the measure.
Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow have cautioned Congress against passing mutual fund reforms that could cost investors more in fees and diminished returns.
The issues raised could become sticking points in the Senate.
"More must be done to assure mutual fund investors that their trust has not been misplaced," said Sen. Joseph Lieberman, D-Conn., a co-sponsor of one of the Senate proposals.
Even the principal author of the House measure, Rep. Richard Baker, R-La., said further changes are needed so the president gets "the strongest possible reform bill."
The scandals have exposed "pervasive financial fraud by all segments of the fund industry," including some trusted companies, said Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee.
The aim of the measure, said Baker, was to "help bring the bright light of truth into fund fees, clean up the way funds are managed, and eliminate the conflicts of interest and utter disregard of (fund directors') duty to mutual fund investors that plague this industry."
The bill would prohibit short-term trading by fund insiders, a practice under scrutiny in many of the recent cases. The quick trades, known as market timing, aren't illegal, but most funds don't allow them because they skim profits from longer-term shareholders.
Consumers Union, which frequently has criticized actions by the Republican-led House, said passage was an important first step toward industry reform and investor protection.
The two "no" votes were by conservative Reps. Ron Paul, R-Texas, and Jeff Flake, R-Ariz.
The proposed SEC changes include a requirement that board chairmen of fund companies be wholly independent from the companies managing the funds -- a reversal of the agency's previous position.
Also, three-quarters of the directors sitting on a fund company board would have to be independent, up from the currently required 50 percent of directors, SEC Chairman William Donaldson told the Senate Banking Committee at a hearing Tuesday.
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