Month: December 2003

The Tax Court case mentioned in this post and discussed first at Roth CPA.com here made the Wall Street Journal today: “The Downside of a $200,000 Payoff.”

CFO.com reports on plan sponsor reaction to recent mutual fund investigations:: “Subject to Failure: Recent scandals in the mutual-fund industry leave employers questioning the security of their plans.” As to the concern over ERISA fiduciary liability, the article notes:

If the practices being investigated are found to be widespread, plan participants may be being robbed of billions of dollars in retirement savings. . . Those costs, along with the potential for missed profits, are also raising fiduciary concerns. It seems unlikely that plan sponsors can be held liable for improper activities in mutual funds that have occurred up until now. But Mercer Bullard, a professor of securities law at the University of Mississippi School of Law, notes that after the Nations Funds revelations, companies are “on notice” that they can be held liable from now on.”

The article gives an overview of how plan sponsors of 401(k) plans are reacting to all of the mutual fund investigations. One plan sponsor notes that its plan fiduciaries are now reviewing the plan’s funds regularly and asking such questions as “[w]hat kind of controls does the fund have on [market timing]? What brokers does the fund use? and what kind of surveillance is in place to detect frequent trading?”

Then, Jim Juback writes this very interesting article at MSN Money.com: “3 more mutual fund scandals in the making: Reader e-mails tell me there’s still more rot in the fund industry that’s about to be exposed. Here’s what could be next — and what might happen to the industry as a result.”

Forbes.com is reporting that some are criticizing the SEC for its proposals today: “SEC mutual fund proposals criticized as not enough.”

The New York Times is reporting: “More Fallout in the Mutual Fund Industry.”

The Wall Street Journal has this article: “Market Timing Takes Toll On Money-Market Funds.”

“What do Marxists, high school students, frequent flyers and mutual fund investors have in common? Answer: They all want a world without classes.”: The Street.com reports in an article entitled “Mutual Fund Class Warfare.” The article points readers to the SEC’s Mutual Fund Cost Calculator which was mentioned here earlier this week.

Also, for those seeking information about all that has gone on in the investigations in the last couple of months, this article at Forbes.com will tell you: “CHRONOLOGY-Key events in mutual fund trading probe.”

More charges being brought, more executives stepping down, and more class action lawsuits being filed. You can view some of the actual cookie-cutter complaints being filed here and here.

In spite of all of this, the Globe and Mail is reporting: “Mutual fund sales climb.”

Do you ever feel like all of that HIPAA “stuff” is just beyond you, but you would like to know the basics just in case? Then this article by Jennifer Stiller is for you: “What Every Lawyer Needs to Know About the HIPAA Privacy Regulations.” The article highlights “what legal practitioners generally need to know for purposes of ordinary legal practice.”

Also, the Segal Company has this: “Better Safe than Sorry: Taking Advantage of DOL Guidance to Identify and Correct Health Plan Compliance Violations.” The article discusses DOL audit activity going on in the HIPAA and health plan arena with respect to multiemployer plans.

The Washington Times is reporting a corporate lobbyist as saying that it is not likely that the Senate is going to come to any agreement over the whole pension funding issue: “Needed pension fixes may not come.”

The Wall Street Journal is reporting in this article–“SEC Adopts Proposed Rules
To Address Fund Scandal“–that the SEC has voted 5-0, to propose a “hard cutoff” time as part of an overhaul of the fund industry’s operation. Under the rule, all orders to buy and sell mutual funds would have to be received by the fund company by 4 p.m. Eastern time.

Other articles:

• CBS Marketwatch.com: “SEC approves proposal to stop late fund trading”
• Forbes: “US SEC proposes ‘hard’ trade close for mutual funds“

You can read U.S. Treasury Secretary John Snow’s comments about the new proposal here.

The New York Times reports on the IRS’s new Electronic Account Resolution system in this article: “I.R.S. Set to Resolve Disputes Online.” Under the system, lawyers, accountants, and enrolled agents will be able to resolve disputes with the IRS on behalf of their clients electronically. The article reports:

Under the present nonelectronic system, tax professionals must show the agency a power of attorney from the taxpayer before the I.R.S. will talk to them. While I.R.S. clerks will sometimes accept a faxed form, getting approval to represent a client can take days.

With the new system, a taxpayer fills out the power of attorney form and gives it to the tax adviser. Then the adviser logs on to an I.R.S. computer, using a secure Internet connection, punching in the client’s adjusted gross income from any of the three previous years, the year of the return and the taxpayer’s birth date. The taxpayer also gives a self-selected personal identification number.

To start out, the system will be used to resolve simple problems, like tracing payments, tracking refunds and entering into installment agreements to pay taxes. Later it may be utilized to resolve more complex problems, like proposals to settle a tax debt for less than the full amount. The system will only be available to tax professionals who file 100 or more tax returns electronically.

Thanks to the Roth CPA.com for referring us to this interesting tax court case in which the IRS sought to tax a settlement received by a cameraman who was allegedly injured by a very well-known basketball player in what the court referred to as the “incident.” (T.C. Memo. 2003-329). The writer notes that the Bulls won in that game 112-102 and that the player received an 11-game suspension and a $25,000 fine from the NBA. The cameraman walked away with $200,000 and the IRS later claimed its fair share. Did the IRS win? Partially. The court held that the IRS could tax only $80,000 of the settlement and that the other $120,000 was paid on account of physical injuries and therefore excludable from income.

The Philadelphia Inquirer today reports on 12b-1 fees: “A 1980 mutual-fund fix still controversial.” The report also includes a graphic on mutual fund fees and a list of all of the different types of fees charged by mutual funds.

Mellon’s Human Resources & Investor Solutions has an article on the new FASB pension disclosure rules which were proposed on November 26, 2003: “New Pension Disclosures Required in 2003 Financial Statements.” The article notes that FASB has now decided to require the disclosure of investment strategy by all entities whether or not they disclose their target allocations. (You can access a previous post on FASB’s proposed changes here.)

AccountingWeb.com also reports: “FASB Close to New Pension Reporting Rule.”

With all of the talk about changing mutual fund providers in the current mutual fund scrutiny, one of the key elements in the decision-making process will be the costs involved in changing providers. For those who do not know, the SEC provides a Mutual Fund Cost Calculator at its website. Here is what the SEC has to say about the calculator:

The Mutual Fund Cost Calculator enables investors to easily estimate and compare the costs of owning mutual funds. . . Mutual fund costs take a big chunk out of any investor’s return. That’s why it’s important for investors to know what costs they are paying, and which cost structure is best for them. By using the Cost Calculator investors will find answers quickly to questions like this: Which is better, a no-load fund with yearly expenses of 1.75% , or a fund with a front-end sales charge of 3.5% with yearly expenses of 0.90%?

The SEC states at its website that “costs aren’t the only thing that should be considered when investing in a mutual fund” (an understatement after recent mutual fund scandals) and that the investor should consider the following in deciding whether or not to invest in a certain mutual fund:

• the number of years needed to reach an investment goal,
• the type of stocks, bonds, or other securities that the fund buys,
• the risk of the fund,
• the fit between the fund and the investor’s portfolio (diversification),
• the fund company or portfolio manager who runs the fund,
• the fund’s track record or performance over time, and
• the types of services offered by the fund company.

(The SEC should update its website to include another consideration, i.e. that of the fund company’s status in the current mutual fund investigations.)

The Office of Investor Education and Assistance publishes the “Online Publications for Investors” which provides information regarding the following aspects of mutual fund investing:

• Breakpoints
• Index Funds
• Information Available to Investment Company Shareholders
• Invest Wisely: An Introduction to Mutual Funds
• Mutual Fund Classes
• Mutual Fund Fees and Expenses
• Mutual Fund Investing: Look at More Than a Fund’s Past Performance
• Mutual Fund Prospectus, Tips for Reading One
• Mutual Fund Cost Calculator

In addition, the SEC provides additional information entitled “Publications on Mutual Funds, Fees, and 401(k)s.”

Finally, regarding the mutual fund industry problems in general, Newsday.com is reporting today: “Outflows Cause Concern For Mutual Fund Investors.” Also, the Seattle Times reports: “When employer makes 401(k) changes, doing nothing can cost you.” The latter article notes that “[s]ome companies, such as drug maker Merck, of Whitehouse Station, N.J., are eliminating certain equity investments and then transferring participants’ balances into money-market accounts” and this “puts the onus on participants to reallocate the investments or risk not having them keep up with inflation.”

UPDATE: An article from the New York Times: “What Do All Those Fees Add Up To?” Also, one from MSNBC.com: “The Mutual Fund Scandal: Unfair Fight.”

Also, in November the Wall Street Journal ran this article–“When Your Mutual Fund Cheats on You: How to Dump It Without Getting Clipped” (subscription required)–which you can now access at the Houston Chronicle here.

Today’s Washington Post has this op-ed: “Mutual Fund Investors Need to Ask Tough Questions of the SEC and Congress.”

FURTHER UPDATE: You can access the PBS Transcript of the NewsHour with Jim Lehrer here which discusses the mutual fund crisis with Matt Gnabasik of the Blue Prairie Group and Christine Benz, editor of the Morningstar Fund Investor newsletter. The discussion was focused on “how the investing public can deal with the scandals.” Also, the NewsHour with Jim Lehrer carries an interview with SEC Chairman William Donaldson last week regarding the “ongoing investigation into misconduct in the mutual fund industry.” You can access that transcript here.