COLLECTED WISDOM™ on the Ongoing Mutual Fund Scandal and Other Issues

In this Collected Wisdom™ we have pulled together some of the best material published on the issue and what plan sponsor should know and do. We will update the content as the issue develops. For articles and other information on other fiduciary issues, click here for our COLLECTED WISDOM™ on fiduciary responsibility and liability issues.

New Study Shows Mutual Funds Unable to Regulate Short-Term Trading in Third-Party Accounts - Summary: U.S. Senator Peter Fitzgerald (R-IL) today praised a newly released private study that concludes the largest mutual fund groups are unable to monitor or regulate market timing in shareholder accounts held by third-party financial institutions. Fitzgerald's sweeping mutual fund reform legislation (S. 2059) and a House companion bill (H.R. 4505) proposed by Rep. Paul Gillmor (R-OH) would correct that problem by requiring full disclosure of such trades. Located at: 401khelpcenter.com, August 2004. Click on headline for full article.

How One Plan Picked a New Provider Amid the Mutual Fund Scandal - Summary: For Contec, Inc., the mutual fund industry's trading scandal was the "last nail in the coffin" in its decision to switch 401k providers, says Andy Thrower, chief financial officer of the Spartanburg, South Carolina-based maker of products used in critical environments like clean rooms to control contaminations. "It points to a much deeper and more costly problem," he says. "The trading scandals are like what people in the accounting profession call 'skimming.' There is a lot of money coming off that people just do not see." Located at: Plansponsor.com (free registrations required), July 2004. Click on headline for full article.

SEC Launches Sweep Examination of Mutual Fund 401k Payments - Summary: McHenry Consulting announced the release of a client alert detailing a new sweep examination currently under way by the Securities Exchange Commission. The SEC study targets industry compensation practices in the distribution of defined contribution retirement plan products and services. McHenry's four page notice provides a complete list of questions sent to mutual fund companies by the SEC over the past several weeks. The twenty-five questions delve deeply into the who, what, why, how and "how much" of retirement product compensation. Located at: Mchenry Consulting , July 2004. Click on headline for full article.

SEC's New Requirements for Mutual Fund Boards: It's a great first step, but... - Summary: The recent actions taken by the SEC are all great steps in the right direction, but still more needs to be done to protect mutual fund shareholders. Here is what else needs to be done. Located at: 401khelpcenter.com, June 2004. Click on headline for full article.

SEC Releases Rule Changes for Mutual Fund Industry - Summary: The Securities and Exchange Commission voted to adopt changes to its rules regarding short selling; its requirements for disclosures by investment companies concerning board approval of advisory contracts; and its investment company exemptive rules, designed to improve fund governance practices. Located at: 401khelpcenter.com, June 2004. Click on headline for full article.

ERISA Fiduciary Responsibility: CEOs and Directors In the Bull's Eye - Summary: CEOs and boards of directors commonly are responsible for designating individuals to manage and administer company pension plans. The DOL and others, however, are pressing executives and directors to continue overseeing those plans after the appointment process is over. In particular, the DOL has long interpreted ERISA to impose a duty of monitoring on CEOs (and other designating officials, like a board of directors), who appoint other fiduciaries to run a plan. Fiduciaries who fail to live up to their responsibilities are potentially subject to personal liability for plan losses. Located at: Pepper Hamilton LLP, June 2004. Click on headline for full article.

SEC Soften 'Hard Close' Proposal - Summary: Securities and Exchange Commission Chairman William Donaldson said the SEC may adopt alternatives to a proposed rule that would bar mutual funds from accepting orders after the market close for trades at that day's price. Located at: New York State Society of Certified Public Accountants, June 2004. Click on headline for full article.

ERIC Submits Comments to the SEC on 2% Redemption Fee - Summary: Because the proposed rule fails to focus on participant-directed investment transfers, the proposed rule is far broader than required to accomplish its objective, and the proposed rule will impose excessive and unnecessary costs on the very investors whom the Commission seeks to protect: long-term investors who do not pursue short-term trading strategies. Located at: ERISA Industry Committee, May 2004. Click on headline for full article.

Summary of SEC Examinations Of Investment Companies And Investment Advisers - Summary: At the Senate Banking, Housing and Urban Affairs Committee hearing entitled "Review of Current Investigations and Regulatory Actions Regarding the Mutual Fund Industry," Chairman Richard C. Shelby requested that the Securities and Exchange Commission (SEC) provide him with a comprehensive report on the SEC's examinations of investment companies and investment advisers. In response, the staff of the SEC's Office of Compliance Inspections and Examinations prepared and issued this report last month. Located at: Securities and Exchange Commission , April 2004. Click on headline for full article.

How Plan Sponsors Are Coping With The Mutual Fund Scandal - Summary: The mutual-fund industry contends that the fast-spreading allegations of improper trading at fund companies should not worry the approximately 400,000 corporate sponsors of 401k plans. But worry they do. That, at least, is the conclusion of a new survey by CFO magazine, in which a full 86 percent of respondents express concern about mutual-fund mismanagement. More than half, in fact, say they are quite or extremely concerned, especially about conflicts of interest among fund traders and high management fees. So what's a sponsor to do? Located at: CFO.com, April 2004. Click on headline for full article.

Testimony of Edward A.H. Siedle Before the Senate Committee on Banking, Housing and Urban Affairs - Summary: Ted Siedle has been referred to as the "Sam Spade of money management" and also been called "the nation's most vocal critic of money management abuses." His thoughts and comments are always insightful and instructive. Located at: 401khelpcenter.com, April 2004. Click on headline for full article.

Assessment of Regulatory Reforms to Improve the Management and Sale of Mutual Funds - Summary: GAO commends SEC and other regulators for their swift regulatory response to recently revealed abusive mutual fund practices. However, some proposed actions need to be thoroughly assessed to ensure equitable treatment for all investors and others will need to be reinforced with enhanced compliance, enforcement, and investor education programs to be truly effective. Located at: US General Accounting Office , March 2004. Click on headline for full article.

Additional Disclosures Could Increase Transparency of Fees and Other Practices - Summary: GAO recommends that SEC consider the benefits of requiring additional disclosure relating to mutual fund fees and evaluate ways to provide more information that investors could use to evaluate the conflicts of interest arising from payments funds make to brokerdealers and fund advisers' use of soft dollars. SEC generally agreed with the contents of our report and indicated that it will consider the recommendations in this report carefully in determining how best to inform investors about the importance of fees and other disclosures. Located at: US General Accounting Office , March 2004. Click on headline for full article.

SEC Proposing Rule on Disclosures Regarding Portfolio Managers - Summary: The proposals would extend the existing requirement that a registered management investment company provide basic information in its prospectus regarding its portfolio managers to include the members of management teams. The proposals would also require a registered management investment company to disclose additional information about its portfolio managers, including other accounts they manage, compensation structure, and ownership of securities in accounts they manage. Located at: Benefitslink.com , March 2004. Click on headline for full article.

Proposed SEC Rule on Prohibition on the Use of Brokerage Commissions To Finance Distribution - Summary: The Securities and Exchange Commission is publishing for comment amendments to the rule under the Investment Company Act of 1940 that governs the use of assets of open-end management investment companies (‘‘funds’’) to distribute their shares. The amended rule would prohibit funds from paying for the distribution of their shares with brokerage commissions. The proposed amendments are designed to end a practice that is fraught with conflicts of interest and may be harmful to funds and fund shareholders. Located at: Benefitslink.com , March 2004. Click on headline for full article.

DOL Provides Fiduciary Guidance for Dealing with Mutual Fund Scandal - Summary: Since news of the mutual fund scandals broke in the Fall of 2003, many fiduciaries have become concerned about their obligations with respect to plan investment in mutual funds. In response, the U.S. Department of Labor recently issued guidance on how plan fiduciaries should respond to well-reported allegations of mutual fund abuses, including late trading and market-timing. The new guidance, a brief but significant statement from Assistant Secretary of Labor Ann L. Combs, responds to numerous requests for the DOL's views on the mutual fund scandals. Located at: Kirkpatrick & Lockhart LLP , February 2004. Click on headline for full article.

Mutual Fund Scandals - Summary: Forewarned is forearmed. The failure to make an adequate investigation into issues that are relevant to the selection and monitoring of the investments in your plan is a fiduciary breach. Located at: Reish Luftman Reicher & Cohen, February 2004. Click on headline for full article.

SEC Goes "Public" with Redemption Proposal - Summary: As anticipated, the SEC has decided, by a 4-to-1 vote, to see what the public thinks about a mandatory redemption fee on quick, market-timing trades in mutual funds. What isn't totally clear at present is how such a redemption fee might be levied on retirement plan investors. Located at: Plansponsor.com (free registration required), February 2004. Click on headline for full article.

The Mutual Fund Scandal: Steps for the Prudent Fiduciary - Summary: Fortunately, most of the mutual fund litigation so far has focused on the mutual fund companies, not plan sponsors, trustees, benefit committees or other plan fiduciaries. Nevertheless, we think it prudent to make sure your fiduciary "house" is in order. Here are some tips. Located on: 401khelpcenter.com, January 2004. Click on headline for full article.

SURVEY: While Employers Are Concerned About the Mutual Fund Scandal, Employees Aren't - Summary: Do employers who sponsor defined contribution plans like 401k's understand the mutual fund scandal and its impact on their plans? According to a just completed national survey of 374 plan sponsors by the Blue Prairie Group and 401khelpcenter.com, the answer is a resounding yes. Learn more about how plan sponsors are dealing with the "scandal." Located at: 401khelpcenter.com, LLC, January 2004. Click on headline for full article.

Guide to SEC Probe of Consultant Pay-to-Play Schemes - Summary: The Foundation for Fiduciary Studies has prepared this guide to assist you in understanding the complex issues associated with the SEC probe on the consultant 'pay-toplay' schemes. Located at: Foundation for Fiduciary Studies , January 2004. Click on headline for full article.

Guide to SEC Probe of Mutual Fund and Brokerage Scandals - Summary: The Foundation for Fiduciary Studies has prepared this guide to assist you in understanding the myriad of complex issues associated with the SEC probe on mutual fund families and brokerage firms. Located at: Foundation for Fiduciary Studies , January 2004. Click on headline for full article.

A Prudent Fiduciary Response to the Mutual Fund Trading Scandals - Summary: The New York Attorney General, the Securities and Exchange Commission, and a number of other regulatory agencies are investigating allegations of improper trading practices at a number of mutual fund companies. So far, few mutual fund firms have been charged with civil securities fraud related to the trading activities. However, rumors of more charges and lawsuits abound. Aon Investment Consultants have developed advice for plan sponsors regarding the prudent course of action for investments in their retirement plans. Located at: Aon Investment Consultants, November 2003. Click on headline for full article.

An Unsuccessful ERISA Legal Challenge To Market-Timing Restrictions - Summary: With recent market-timing allegations in the current mutual fund investigation, there has been much discussion around the practice of placing restrictions on frequent trading in 401k plans. Such restrictions are usually drafted into the prospectus, the Summary Plan Description ("SPD") and the plan document governing the 401k plan. Has anyone challenged the legality of such restrictions under ERISA? The answer is yes. Here is a summary. Located at: Benefitscounsel.com, November 2003. Click on headline for full article.

What The Current Mutual Fund Trading Allegations Mean to Retirement Plan Sponsors - Summary: In recent weeks, the pillars of the retirement plan community have once again been shaken by allegations of wrongdoing and afflicted with a new round of "Enronitis." Enronitis is the fear that financial irregularities will afflict a large area of the financial markets and is particularly contagious in retirement plans. This time, the outbreak of Enronitis is focused on the alleged impropriety of certain improper trading practices: Market Timing and Late Trading. How Should a Plan Sponsor React to Avoid Enronitis? Located at: 401khelpcenter.com, November 2003. Click on headline for full article.

The Mutual Fund Scandal: What Should Plan Sponsors Do? - Summary: For companies that sponsor 401k retirement plans, the news is depressing. It seems like every few days another trusted name in the mutual fund industry is caught up in the growing scandal and there’s no clear end in site. It’s like watching a storm develop on the open prairie and not knowing whether you’re in its path, whether to take shelter or even where to take shelter. Located at: Blue Prairie Group , November 2003. Click on headline for full article.

The Growing Mutual Fund Scandal: a Practical Guide for ERISA Fiduciaries - Summary: Amidst the avalanche of information regarding the growing mutual fund scandal, retirement plan fiduciaries are once again facing tough choices as to how the scandal affects a retirement plan’s investment offerings. The following issues are relevant to ERISA retirement plans as well as any state pension fund or Section 403(b) or Section 457 plan. Located at: Benefitslink.com , November 2003. Click on headline for full article.

Making Sense of the Mutual Fund Scandal - Summary: Everything you may not want to ask (but really should know) about the crisis that's rocking the investment world. To make sure you have enough information to navigate this scandal, we provide answers to frequently asked questions and advice on how to get through unscathed. Located at: PBS.org, November 2003. Click on headline for full article.

A Dilemma for Plan Fiduciaries - Summary: One adviser recommends that plan sponsors inform workers of the timing scandals, provide a substitute offering for any implicated funds and let participants decide their course of action. However as another adviser correctly states '[S]aying we recognize there is a problem, but we are still going to offer it to you sets up a big fiduciary issue.' Located at: Benefitscounsel.com, November 2003. Click on headline for full article.

EDITORIAL: A Strictly Enforced Trading Deadline Will Not Threaten Retirement Plans - Summary: The Investment Company Institute (Institute) has made several recommendations that would fundamentally reform mutual fund trading to combat the trading abuses that have come to light recently. The 401khelpcenter.com supports these recommendations. It will help ensure the absolute integrity of the mutual fund trading in the public's eye and is necessary to rebuild investor confidence. Located at: 401khelpcenter.com, October 2003. Click on headline for full article.

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