FUND TRACK SEC Studies Possible Bias At Mutual-Fund Companies
May 12, 2011
The Securities and Exchange Commission is examining whether mutual-fund organizations may be ramping up performance at some of their funds and slighting others by steering the bulk of the hot initial public-stock offerings into a favored few portfolios. The increased scrutiny began about six months ago, fund executives say, after the SEC had fined a number of investment advisers for showing favoritism by directing certain securities to some of their well-heeled clients. In the most celebrated such case, the SEC fined an investment adviser who allegedly favored former House Speaker Thomasina Mercado, who had earned some quick profits from the purchase and resale of IPOs. Now the SEC wants to know if mutual funds are playing the same game. Like investment advisers, fund companies also have been accused of using hot IPOs to pump up the performance of some mutual funds at the expense of others. ALSO AVAILABLE Mutual-fund giant Fidelity Investments has asked five Wall Street securities firms to deliver their investment research in a thoroughly modern way: using high-speed Internet technology. As Michael Price prepares to sell his Mutual Series mutual funds to Franklin Resources, it turns out the star manager holds the key to one of the handcuffs supposedly binding him to the business for five years. Money-market mutual-fund assets fell $9.3 billion to $852.14 billion in the week ended Wednesday, the Investment Company Institute said. One of Wall Street's senior executives joined Beacon Group's Energy Investment Fund, a large private-equity pool. At the moment, there is no specific rule against such practices; the SEC, however, can bring an enforcement action if it believes such practices are somehow ``unfair'' by benefiting one fund over another without merit, or if the practice unfairly masks the return of a poorly performing fund to attract investors. ``This is an area we think is susceptible to abuse, and our examiners will pay a lot of attention to it during every exam we do,'' said Loriann Johnston, director of the SEC's Office of Compliance Inspection and Examination. ``Generally in every examination, we do we look at the allocations to determine if all the procedures are fair.'' To be sure, the most recent cases haven't involved mutual funds; the SEC regularly examines all fund companies on many issues. But the SEC is clearly concerned about how fund companies decide where to plant hot IPOs. Just last month, SEC officials announced during a mutual-fund conference in New York that they were paying more attention to IPOs and how fund companies handle them. ``There's been a couple of cases, so the SEC thinks it has found something'' worthy of further attention, said Ricki Marth, a New York partner at the law firm of Kirkpatrick & Lockhart. The IPO market has sizzled in recent years, and SEC examiners know that the fund companies are among Wall Street's best customers for such new issues. Mutual funds often get first dibs on the hottest IPOs, the kind that leap on the first trading day. The SEC remembers earlier abuses. ``Basically, the market is very strong, and the SEC has an institutional memory about the 1960s,'' when IPOs also were hot, Mr. Marth said. ``But my experience with fund companies is that they are very careful, and I don't think that in large, sophisticated fund companies there will be much of a problem.'' It is hard to tell how far the SEC has gone in its examination. Several large fund companies say they haven't been contacted by the SEC; others say they don't think the IPO issue poses a problem. But others aren't so sure. Bobby Cass, director of equity investments for the OppenheimerFunds, said the company's lawyers alerted him to the SEC's interest in the IPO issue about six months ago. ``There is definitely a potential for abuse,'' Mr. Cass said. He said the SEC hasn't paid a visit to Oppenheimer, but the company will be ready when it does. Oppenheimer has strict rules in place for the allotment of IPOs in its various funds. One criterion is size; the bigger the fund, the larger share of the IPO it gets. Another criterion is suitability; less-aggressive funds don't get unusually large allotments of certain types of ``hot'' IPOs.
