Fund Manager, Manage ThyselfGeoffrey Smith
Self-regulation rarely yields such tough-minded results. On May 9, facing investor outrage and pressure from Washington, the mutual fund industry proposed sharp restrictions on personal trading by fund managers. Some of the broadly worded proposals leave room for questions. But taken together, they represent a significant obstacle to abuses.
Among the practices the Investment Company Institute wants to ban or severely restrict: letting fund managers invest in initial public offerings and private placements, and making quick profits on investments of less than 60 days. The rules, which won kudos from government officials and analysts, come just four months after the event that triggered the self-examination: the firing in January of Invesco Funds Group Inc.'s star fund manager, John Kaweske, who allegedly failed to report personal investments he made in private placements.
That sort of investing would be sharply curtailed by the ICI's proposals. Also targeted: such potential conflicts of interest as "front-running," when managers take personal positions in stocks and rely on their fund's clout to boost the shares. One of the new rules requires managers to wait seven days before and after their fund trades in a stock before they can buy it themselves.
Granted, the recommendations are not watertight. For one, it's not clear from the wording of the IPO rule whether portfolio managers are barred from investing in, say, state or municipal bond offerings--markets that lately have had problems with insider dealings. Another similarly vague proposal doesn't specify whether managers can receive restricted stock or warrants in companies as "compensation" for advice.
REAL TEST. Another question: Why does the seven-day rule apply only to portfolio managers? All other employees, including a portfolio manager's secretary, must delay their trades only until an order clears the trading desk. That potentially could allow fund employees to "ethically" piggyback on big positions that create buying or selling pressure.
But the industry has covered its bases. Its policy includes a statement of principal that firms should always put shareholder interests first as well as ensure that all personal trading avoids actual or potential conflicts of interest.
The real test of these rules will come next month, when the Securities & Exchange Commission reports to Congress on the personal trading practices of managers at 30 fund complexes. Assuming they survive the scrutiny, the ICI's member firms would do well to implement them quickly, before Congress forces them to adopt rules of its own making.
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