“Lawyers Are Warned on Mutual Fund Roles“: the New York Times is reporting. According to the article, the SEC is saying that regulators may soon open a new front in their investigation of possible wrongdoing at mutual funds, focusing on the role of lawyers who represent them. This focus on lawyers was revealed in a speech by SEC Commissioner Harvey J. Goldschmid, entitled “Mutual Fund Regulation: A Time for Healing and Reform,” before the ICI 2003 Securities Law Developments Conference on December 4, 2003. Here are some of his remarks:

Fund lawyers, under SEC rules that became effective August 5, 2003, have a similar “reporting up” duty. The SEC’s attorney conduct rules apply to any attorney employed by an investment manager who prepares, or assists in preparing, materials for a fund that the attorney has reason to believe will be submitted to or filed with the Commission by or on behalf of a fund.

Under these rules, an attorney who is aware of credible evidence of a material violation of the securities laws, or a material breach of fiduciary duty, must report this evidence up the chain-of-command or ladder to the fund’s chief legal officer, and ultimately, to the independent members of the mutual fund board.

This “reporting up” requirement should significantly enhance the flow of key legal information (involving “reasonably likely” material violations) to independent members of the fund board. “Reporting up” also empowers lawyers. The requirement will allow dispassionate, independent fund directors ? not conflicted fund investment managers ? to resolve key securities law and conflict-of-interest issues. Everyone should understand that the SEC’s rules are now a matter of substantive federal law. As of August 5, available for violations are the Commission’s traditional broad spectrum of remedies, penalties, and other sanctions.

Mike O’Sullivan at Corp Law Blog weighs in on this development here as well as Professor Bainbridge here.

Regarding the mutual fund scandals in general, the December 15th issue of Business Week has an article entitled “Breach of Trust.” The article makes the interesting point that “changes in retirement plans–particularly innovations in 401(k) plans”–provided fuel for the mutual fund scandals. The article states that just a decade ago, “participants had few funds to choose from and were limited to one trade each quarter.” The article goes on to say that with plans offering so many choices and participants being able to trade daily, it is these innovations which “paved the way for abuses, such as market timing by 401(k) participants.”

The Wall Street Journal today has this article discussing how employers and fund companies “are cracking down on workers who make frequent in-and-out trades in their 401(k) plans”: “The Crackdown on Funds Hits Your 401(k).” Here are what some of the companies are doing to curb market-timing, according to the article:

• Imposing one-day timeouts between trades to make it more difficult for market timers to engage in market-timing.
• Imposing a 15, 30, or even 90-day holding period for certain international funds.
• Imposing redemption fees designed to take some of the profit out of market timing. Fees range from a 1% to 1.5% fee on redemptions of investments in certain international funds, if employees hold the funds for less than 30 days. The move is designed to help compensate participants in the fund for the transaction costs generated by the frequent trading.
• Barring employees from investing in a fund if they engage in market timing.
• Temporarily barring employees from telephone and online exchanges if they make too many trades.

Finally, CBS Market Watch reports: “It’s the expenses, stupid: Illegal timing and trading are distractions.” The article describes how mutual funds are skimming off your money in what is called the “fund industry casino.”

From the New York Times: “Memo Shows MFS Funds Let Favored Clients Trade When Others Couldn’t.”

And would you believe the “Fed Cracks Down on Trading in Its Own Employee Fund.” (From Yahoo! News.com)