The Securities and Exchange Commission yesterday unanimously required managers of mutual funds to report personal investments in their funds and to follow other ethics rules.
Fund managers also will be required to obtain clearance before making personal investments in initial public offerings and limited offerings. Violations of the ethics rules must be reported to company compliance officers, general counsels or other designated officials.
The $7.6 trillion mutual fund industry has been roiled by disclosures that several top fund officials personally profited at the expense of their clients. Last week, Richard S. Strong agreed to pay $60 million to settle charges that he benefited from frequent trades in mutual funds overseen by his Wisconsin-based investment firm.
Commissioner Paul S. Atkins yesterday called such incidents "an abuse of trust that's absolutely intolerable."
"It is extremely troubling that so much of the conduct that led to the scandals in the mutual fund industry was, at its core, a breach of the fiduciary relationship between investment advisers and their advised funds," said SEC Chairman William H. Donaldson. "As fiduciaries, advisers owe their clients more than mere honesty and good faith. Recent experience suggests that all too many advisers were delivering much less."
The rules were approved 4 to 0. Commissioner Cynthia A. Glassman did not attend yesterday's meeting.
To date, the SEC has sued 12 of the 25 biggest mutual fund companies over trading abuses.
Separately, the agency yesterday mandated greater disclosure to investors about discounts they could obtain for buying stock in bulk. A probe last year by regulators at the SEC, NASD and the New York Stock Exchange uncovered evidence that brokers were not offering "breakpoint discounts" to all the people who were eligible to receive them. Earlier this year, 15 firms settled disciplinary charges related to the discounts and agreed to pay $21.5 million in fines.
Mutual funds now must describe eligibility requirements for the discounts in their prospectuses.
"This will enhance disclosure and therefore create . . . greater trust which the mutual fund industry needs," said SEC Commissioner Harvey J. Goldschmid.
Officials at the Investment Company Institute, the mutual fund industry's biggest trade group, said they "strongly supported" the rules passed yesterday.
ICI acting general counsel Amy B.R. Lancellotta said in an interview that the ethics requirement "will reinforce the duty to place investors' interests first."
The SEC is continuing to consider several other proposals to reform the mutual fund industry. Among the items still on its agenda is a plan to require chairmen of fund boards of directors be independent. That proposal remains controversial within the industry.