House Passes Bill to Rein in Mutual Fund Industry

The House overwhelmingly passed a bill that would curb abusive practices in mutual funds, taking the first major step toward legislative reform of the $7 trillion industry.

The bill, which passed on a 418-2 vote Wednesday, would impose penalties against fund trading abuses. It would make directors on company boards more independent from fund managers, and it would require companies to disclose more information to investors about fees and fund operations, the Wall Street Journal reported.

It is likely the legislation will be reworked before a reform package is sent to President Bush. Passage is needed in the Senate, where several different versions of reform have emerged. No action is expected before next year.

Mutual funds are traditionally considered safe investments, with 95 million Americans counting on them for retirement savings and college funds. Confidence has been badly shaken in light of a string of scandals involving fund companies making special trading deals that hurt investors.

The House action comes one day after the head of the Securities and Exchange Commission (SEC) presented Congress with the commission’s own plan for dealing with abuses. In two weeks, the commission plans to vote on a new governance structure for mutual fund companies, with a requirement that chairmen and three-quarters of the board be independent.

The House bill would also prohibit late trading and improper market timing. Late trading is the illegal practice of getting the current day's price on orders to buy or sell shares placed after the close of New York markets. Market timing involves quick trades of mutual-fund shares, which can hurt fund values for long-term investors.

The principal author of the House measure, Rep. Richard Baker, R-La., said the measure was meant to "help bring the bright light of truth into fund fees, clean up the way funds are managed, and eliminate the conflicts of interest and utter disregard of (fund directors') duty to mutual fund investors that plague this industry."

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