Commentary: Wells Fargo's Fixer-Upper

Yes, Strong is a smart buy -- but it will test the bank's mettle at every turn

For Wells Fargo & Co. (WFC ), buying what's left of Strong Capital Management could give the nation's fourth-largest bank a golden opportunity. Menomonee Falls (Wis.)-based Strong saw its reputation destroyed over the past nine months by charges of improper trading, culminating in a $140 million settlement with the Securities & Exchange Commission on May 20. The task of reassuring Strong's share-holders gives Wells Fargo Chief Executive Richard M. Kovacevich a chance to do his bank and the mutual-fund industry a big favor by becoming a model of compliance, governance practices, and investor-friendliness. "They have to be cleaner than clean" to keep investors on board, says Burton Greenwald, a mutual-fund consultant in Philadelphia.

The task takes on an even greater importance because suddenly San Francisco-based Wells Fargo will be a major player in the mutual-fund industry. Adding Strong's $34 billion in assets will propel Wells Fargo from 28th to 19th place among fund families, and give it $110 billion in assets. And Wells Fargo doesn't intend to stop there: It aims to reach the top 10.

For now, investors continue to eye Strong's funds with suspicion. Since the mutual-fund scandal erupted in early September, it has lost $9 billion in assets as of Apr. 30. Morningstar Inc. has rated Strong's funds as a sell for months. But in buying damaged goods at a knockdown price of perhaps $500 million, Kovacevich is once again hewing to his strategy of quietly sniffing out bargains and never overpaying for a deal.

So far, Wells Fargo hasn't decided whether it will drop the tainted Strong name entirely or what will happen to Strong's 70 funds. The bank will form teams of people from both Wells Fargo and Strong to analyze each Strong fund. Expect many of them to be merged into their counterparts at Wells Fargo, with the manager with the stronger track record running the combined fund.

Wells Fargo was never touched by the scandal that still plagues some of the industry's biggest players. And its 69 funds, including its flagship Wells Fargo Large Company Growth Fund, certainly have an untarnished reputation for compliance and governance. "We take corporate governance as the most important premise," says Michael J. Niedermeyer, head of Wells Fargo's investment-management business. "We think that this is a benefit we bring to Strong." But in taking Strong aboard, it would do well to impose the strictest possible rules on its funds. "We'd like to see them go above and beyond the law because Strong's history is so sordid," says Gareth Lyons, an analyst at Morningstar.

For instance, instead of waiting for the SEC to come up with new governance rules, Wells Fargo could immediately adopt several SEC proposals presently on the table. One, which Fidelity Investments and some other fund companies are fighting, would require that at least 75% of fund directors, including the chairman, be independent of the investment manager. Currently, Wells Fargo is almost there, with five of the seven directors overseeing its funds now independent, including the chair. And Wells Fargo could adopt another SEC proposal by disclosing how its fund managers are compensated. In fact, the bank could go even further and begin listing more clearly on regular statements how much an investor is paying to participate in a fund -- as one fund family caught in the scandal, MFS, has started doing.

Such moves would buck up jittery Strong shareholders and bolster an industry that has been severely tarnished. Certainly they won't hinder Wells Fargo's drive to win a place among the top 10 mutual-fund families.

By Louise Lee

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