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Court Overturns Key Mutual Fund Investor Protection

June 22, 2005
Consumers who invest in mutual funds now have fewer protections against unfair manipulations, such as recent "market timing" episodes. A federal appeals court has struck down new Securities and Exchange Commission rules designed to make mutual fund boards more independent of the fund's managers.

Mutual Fund Market Timing • Prudential to Pay $600 Million for Market Timing • Waddell & Reed Settles Market Timing Case • Court Overturns Key Mutual Fund Investor Protection • SEC Missed Mutual Fund Abuses, GAO Finds • Mutual Fund Firms Fined $21 Million • Merrill Lynch to Pay $10 Million • Kaplan Brokers Plead Guilty to Late Trading • PBHG Agrees to Refund $120 Million • Fremont Investment Advisors Settles • INVESCO Settles Market Timing Charges with Colorado • Spitzer Spoils Bank of America's Party

The U.S. Court of Appeals for the District of Columbia didn’t argue with the SEC’s authority to impose the rule. The rub came with the cost of actually implementing it. The court held that the regulatory agency had not investigated the rule’s cost to mutual funds or alternatives offered up by commissioners who voted against the new rule.

The disputed rule would have required that 75 percent of a fund’s directors be unaffiliated with the advisory company that manages the fund. It also stipulated that the fund’s chairman remain independent as well.

Consumer groups had lobbied for the rule, with some calling it a key protection for small shareholders. Barbara Roper, director of investor protection at the Consumer Federation of America, said she hoped the SEC would not abandoned the principle behind the rule. The court said the SEC would not have to redraft a rule that met the court’s guidelines.

The winner in the case is the U.S. Chamber of Commerce, which sued the SEC to block implementation of the rule. Chamber Executive Vice President Stephen Bokat, said the group “applauds the court's decision to stop regulatory overreach by the SEC."

Meanwhile, court cases continue, brought by small investors victimized by “market timing,” in which a mutual fund manger allows quick in-and-out investing to reap maximum profit. While the practice is legal, but funds don’t allow it because it racks up expenses that can hurt long-term shareholders. Cases are now pending against Janus Capital Group, Putnam Investments, Strong Capital Management, Alliance Capital Holdings and other mutual fund companies.

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