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Tuesday, September 23, 2003

Fund Scandal Not Over Warns Levitt

by: Sean Hanna, Editor in Chief

Former SEC-chief Arthur Levitt warned fund directors Monday that the look into the fund industry is closer its the start than its end. He made his predictions during an address to the Mutual Fund Directors Forum meeting held yesterday in New York City.

"Mutual funds face the greatest threat in the history of those companies," said Levitt. "If this isn't cause for congressional investigation, nothing is." Levitt also implied that fund firms need to take a look at how they distribute their product.

"The brokerage system of selling mutual-fund shares doesn't work right," Levitt said. "It's broken and it needs to be fixed."

Perhaps most controversial of Levitt's suggestions is for outside directors to lead fund boards. The industry has already lobbied hard last summer to nip an effort by Congress that would have required board chairs to be independent directors. He also floated the idea of fund boards tapping an ombudsman to look into issues of abuse at funds.

"Part of the settlement should be to put on those boards a director -- an additional director -- that would be a representative of investors," said Levitt. "And I have questions about whether the board itself should not resign."

Levitt's comments came at a meeting dominated by the discussion of recent charges and allegations brought by a host of regulators. Those issues ranged from after-close trading to arbitrage timing and whether brokerages and fund firms are properly recognizing commission breakpoints. Investigations have into these matters have been started by the SEC and the NASD as well as state officials in Massachusetts, New York, Illinois and Colorado.

Meanwhile, Meyer Eisenberg, a deputy general counsel at the SEC, told the attendees that the Commission may take a closer look at revenue sharing and shelf-space fees fund firms pay to distributors. The issue is whether those fees represent "money left on the table" by investment companies that is part of the cost of distribution. If so, those fees must disclosed.  

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