The Mutual Fund Scandal and You

Our survey finds readers fairly outraged over the alleged abuses New York's Eliot Spitzer is investigating, and they want changes

Here's a news flash for the mutual-fund and hedge-fund industries: Investors may not be entirely up to speed on how your businesses operate (see BW Online, 9/22/03, "A Primer on the Mutual-Fund Scandal"), but they're in no mood to tolerate any hijinks that may cost them money. And they're all for tighter regulations for both types of funds -- and for stiff penalties, including jail time, for fund execs who violate those.

At least, that's the reaction of the 430 readers who took part in our Sept. 19 Reader Survey on this topic.

Some 79% of those who responded said they're somewhat or very familiar with the investigation of New York Attorney General Eliot Spitzer into the misdeeds of a handful of mutual funds. Based on what they know of that investigation, some 51% said their opinion of mutual funds as an investment is "much less favorable" than before the scandal broke (though 31% said their opinion is unchanged).

INADEQUATE OVERSIGHT.

  Some of the latter evidently are cynics, since 80% of those who participated said they think questionable practices at mutual-fund companies are either somewhat or very prevalent, based on what they know of the Spitzer investigation.

Consequently, some 60% of those who participated think regulatory oversight of mutual funds is either somewhat or totally inadequate. And 67% of those who responded think the regulation of hedge funds, some of which may have participated in the shady practices Spitzer is investigating, is somewhat or totally inadequate. That's true even though 35% of those who responded said they aren't familiar at all with what hedge funds do.

Some 82% of those who took the survey characterized as somewhat or very significant the $115 loss Stanford University professor Eric Zitzewitz figures an investor with $10,000 in mutual-fund holdings could have suffered as a result of the shenanigans Spitzer has been uncovering. The same percentage regard as "very significant" the millions in extra income some fund companies may have reaped by cheating.

JAIL TIME, PLEASE.

  That explains why readers pretty much equally favor every reform that experts have suggested for mutual funds (a bare handful think no changes are needed), and why they're in favor of fines, suspended licenses, executive firings, and jail time for funds and their execs who engage in malfeasance.

Some 93% of the readers who participated said they own mutual funds. And some 84% have more than $10,000 invested in mutual funds -- including 45% who have more than $100,000 invested.

Here are the detailed results of the survey, which as always was unscientific, since anyone who wished to could participate:

Do you own mutual funds?

Option Total %  
Yes 390 93.08 %
No 23 5.49 %
Don't Know 6 1.43 %

How familiar are you with New York Attorney General Eliot Spitzer's investigation into mutual fund trading practices?

Option Total %  
Very familiar 120 28.44 %
Somewhat familiar 213 50.47 %
Not familiar at all 80 18.96 %
Not sure 9 2.13 %

Based on what you know about that investigation, would you say that your opinion of mutual funds as an investment vehicle is now:

Option Total %  
Unchanged 129 30.79 %
Much more favorable 6 1.43 %
Much less favorable 214 51.07 %
Not sure 70 16.71 %

Based on what you know about Spitzer's investigation, do you think questionable practices at mutual-fund companies are:

Option Total %  
Very prevalent 116 27.75 %
Somewhat prevalent 221 52.87 %
Not at all prevalent 32 7.66 %
Not sure 49 11.72 %

How much money do you have invested in mutual funds?

Option Total %  
Less than $10,000 36 8.78 %
$10,001 to $50,000 76 18.54 %
$50,001 to $100,000 83 20.24 %
More than $100,000 183 44.63 %
None 20 4.88 %
Not sure 12 2.93 %

If your fund company is named in the investigation, how likely would you be to consider selling your shares in that company's funds?

Option Total %  
Very likely 173 41.49 %
Somewhat likely 121 29.02 %
Neither more nor less likely 51 12.23 %
Somewhat unlikely 23 5.52 %
Not likely at all 16 3.84 %
Don't know 33 7.91 %

Would you say that the current degree of regulatory oversight of mutual funds is:

Option Total %  
Very adequate 12 2.87 %
Somewhat adequate 55 13.16 %
Neither more nor less adequate than for other investments 72 17.22 %
Somewhat inadequate 147 35.17 %
Totally inadequate 105 25.12 %
Not sure 27 6.46 %

Hedge funds may have worked out deals with fund companies allowing them to engage in the types of trading Spitzer has challenged. How familiar are you with hedge funds and how they operate?

Option Total %  
Very familiar 38 9.11 %
Somewhat familiar 217 52.04 %
Not familiar at all 144 34.53 %
Not sure 18 4.32 %

Based on what you know about hedge funds, would you say the current degree of regulatory oversight of them is:

Option Total %  
Very adequate 9 2.20 %
Somewhat adequate 16 3.90 %
Neither more nor less adequate than for other investments 17 4.15 %
Somewhat inadequate 92 22.44 %
Totally inadequate 182 44.39 %
Not sure 94 22.93 %

According to Eric Zitzewitz, an assistant professor of economics at Stanford University, an investor with $10,000 in an international fund would have lost an average of $115 in 2001 as a result of the some of the practices Spitzer has uncovered. How significant do you consider such a loss to be?

Option Total %  
Very significant 191 45.91 %
Somewhat significant 152 36.54 %
Not significant at all 65 15.63 %
Not sure 8 1.92 %

If mutual-fund companies reaped millions or tens of millions in extra income because of the trading practices Spitzer is investigating, how significant would you consider that to be?

Option Total %  
Very significant 343 82.06 %
Somewhat significant 58 13.88 %
Not significant at all 6 1.44 %
Not sure 11 2.63 %

Of the following remedies for the practices Spitzer is investigating, which would you most favor? (Choose as many as you think would be appropriate):

Option Total %  
No changes are needed 6 0.41 %
Replace boards at funds that have engaged in questionable practices 245 16.83 %
Require funds to disclose more information about their expenses -- including one of their biggest, the cost of trading 336 23.08 %
Require funds to reduce or eliminate certain extra fees -- such as "marketing charges" -- that they levy on shareholders 244 16.76 %
Reform sales practices, such as one where funds pay brokerage houses extra to push their products 264 18.13 %
Require funds to reveal the performance incentives created by the compensation plans of fund managers 312 21.43 %
Other 49 3.37 %

What types of penalties should regulators levy on fund companies that are found to have engaged in illegal trading practices?

Option Total %  
Fine such companies 228 23.97 %
Suspend or revoke the registered investment company status of such companies 152 15.98 %
Force fund companies to fire key executives involved in questionable trading schemes 253 26.6 %
Fund executives convicted of illegal practices should be sent to jail 300 31.55 %
Not sure 18 1.89 %
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