'Heads should roll' at the SEC, says NY Attorney General Spitzer

The Securities and Exchange Commission found itself in the hot seat at a Senate hearing yesterday for failing to act sooner to clean up the mutual fund sector.

Charges against the industry range from illegal—including 10 percent of the fund firms that allegedly have participated in late trading, which allows favored investors to trade after the 4 p.m. deadline-to questionable, including marketing timing, in which larger, more savvy investors trade in and out of a fund quickly to make a better profit. These trades run up brokerage costs for all investors, penalizing smaller investors in particular.

Three hearings are scheduled this week to look at mutual fund industry practices. The Los Angeles Times reported that bipartisan support is coming together in the House to expand a mutual fund reform bill sponsored by Rep. Richard H. Baker (R-LA) that was approved in committee in July but was kept from a vote of the full house by industry opposition.

"It is appalling to me that these practices, which benefit a select group of individuals at the expense of the vast majority of mutual fund investors, continue," Sen. Susan Collins, R-ME, head of the Senate Governmental Affairs Committee, said at a hearing by the panel. "I question why the Securities and Exchange Commission ... has failed to detect these practices, to impose appropriate restrictions on them, or to penalize those who appear to be misusing investors’ money."

New York Attorney General Eliot Spitzer has been leading the charge to clean up the mutual fund business and he testified at Monday’s hearing. Last week he said "heads should roll" at the SEC for its failure to act quickly to address a tip that market-timing trades were occurring at Putnam Investments.

"If I had been the head of the bureau overseeing the mutual fund industry for the past year," he told the New York Post, "I would resign."

The SEC acknowledged it could have acted more rapidly, but questioned the political motivations of Spitzer, a likely gubernatorial candidate.

"This should not be a competitive situation between regulators," SEC chief William Donaldson said. "The spectacle of one regulatory agency criticizing another is not healthy."

There were shakeups in the industry even as the regulators resorted to trading barbs. Putnam Investments CEO Lawrence Lasser was fired today by parent company Marsh & McLennan because of his role in the trading scandal, Reuters reported, adding that Putnam funds have seen at least $4.3 billion pulled out by state pension plans since Lasser was implicated last week. This weekend Strong Mutual Funds Chairman Richard Strong resigned after allegedly making more than $500,000 by way of alleged improper share trading. Spitzer has said he will prosecute Strong.

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