Vanguard’s Founder Calls For Better Fund Governance, Highlights Nine Emerging Issues

In a speech before the Mutual Fund Regulation and Compliance Conference entitled, "Mutual Funds in the Coming Century ... While We're At It, Let's Build A Better World," John Bogle called on the mutual fund industry to heed the Investment Company Act of 1940, which requires that mutual funds be managed in the interest of the fund shareholders, and not in the interest of their managers.

Mr. Bogle also identified "nine vital emerging issues" that he believes the mutual fund industry and the Securities and Exchange Commission (SEC) will have to address in order to ensure that mutual funds are managed and operated in the interest of their shareholders. Those nine issues are:

  1. Mutual fund management fees - Fees and operating costs incurred by equity funds have risen from $134 million in 1965 to $35 billion in 2003.
  2. The management fees paid by mutual funds vastly exceed those paid by pension accounts - Large pension funds pay management fees that are a fraction of those paid by mutual funds advised by the same manager.
  3. Disclosure of mutual fund executive compensation and fund holdings - Mutual fund executives should be held to the same standard of disclosure that applies to other corporate executives.
  4. Incubator funds - small, privately funded mutual funds not made available to the public - "upwardly bias investors' estimates of fund managers' ability, and thereby attract additional inflows." Mr. Bogle called on the SEC to ban the promotion of returns earned on incubator funds.
  5. 401(k) plans - Noting that most 401(k) plan arrangements are unregulated, Mr. Bogle said that an investigation of these plans' administrative costs and advisory fees, and the sources of compensation paid to pension consultants should be a "high strategic priority."
  6. IPO allocations - Mr. Bogle said that it's time for a "comprehensive analysis" to examine if the funds which received allocations of "hot" IPOs in the recent stock market bubble were the funds whose buying power generated such allocations.
  7. Ownership of mutual fund managers - Mr. Bogle cited the "conglomeratization" of the mutual fund industry as the driving force behind the change in the industry's focus from one of stewardship to one of salesmanship.
  8. An economic study of the mutual fund industry - Mr. Bogle repeated his call for a comprehensive economic study of the mutual fund industry, focusing on the sources and uses of industry revenue.
  9. The structure of mutual fund governance - Stating that "Common sense often makes clear what statistics cannot prove," Mr. Bogle said that the SEC should require that mutual fund boards of directors have an independent chairman.

In closing, Mr. Bogle noted that the recent mutual fund scandals had demonstrated that, far too often, the fund manager was "driving the mutual fund car," counter to the requirements of the Investment Company Act of 1940. "It's time," he concluded, "to redress the gross imbalance of power between mutual fund managers and mutual fund investors by developing a more shareholder-oriented board structure."

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