January 29, 2004

Newsfeed: David Ruder

David Ruder discusses mutual fund investigations

The mutual fund industry was thought to be scandal-free. But recently, a number of practices have been reported which are thought to not be in the best interest of investors. David Ruder, William W. Gurley Memorial Professor of Law and former chairman of the Securities and Exchange Commission, says the charges are serious.

The charges have been brought by the attorney general of New York involving what’s called market timing, late trading and other activities. And there have been a number of investigations and actions brought by the SEC. We have Congress proposing legislation. It’s a very serious problem.

Ruder believes the SEC’s new rules are headed in the right direction.

Particularly, the one I like the best is the insistence that investment companies and investment advisors adopt compliance programs. There are other rules in the proposal stage. One is called the “hard close.” It would be an attempt to have a cut-off date for pricing mutual funds.

Ruder says mutual fund investors should be concerned, but not discouraged.

Investors need to be concerned that the people managing their money are honest. And they should watch the way in which the funds are managed. There are tremendous reform movements going on today, and it’s likely that all of the funds will be in pretty good shape by the time we finish. Another thing to consider is that there may be some penalty to shareholders when they take their money out. They may have to pay fees on the way out, fees on the way back or they may have to pay taxes. So there needs to be a great deal of care taken in moving money.

Despite the charges, Ruder believes investors ought to invest in mutual funds.

That’s a very good way for the investor to do two things. One is to have the money managed by a professional manager, something that the average investor can’t do. And secondly, to have the benefits of diversification. A small investor can’t spread investment funds across a large area, but by buying a mutual fund, you have the advantage of spreading risk, an important investment strategy.

Ruder believes the SEC should be the governing body in this investigation.

I’m not a big fan of the states coming in and trying to write regulations in the mutual fund area or any other part of the securities industry. I think the SEC ought to do that. That’s not to say states’ attorneys can’t play a role in ferreting out fraud and finding remedies such as fines and restitution of monies, but I don’t think we want them to set the rules.

— Samira Puskar