Originally created 03/17/04

SEC to watch leaders closer



WASHINGTON - In their expanding crackdown on mutual fund abuses, regulators are putting a new category of fund company official on notice: the fund board director.

As part of a $675 million settlement for improper funds trading, Charlotte, N.C.-based Bank of America agreed to remove eight board directors from Nations Funds, its fund business, for their alleged role in allowing the trading violations.

The Securities and Exchange Commission and New York State Attorney General Eliot Spitzer said the punishment, announced Monday, sends the message that directors will be held accountable.

"Where board members do not live up to the duty of care they owe their shareholders, we will try to hold them accountable," Mr. Spitzer said. "This should signal to board members that we are going to be very attentive to their behavior."

But an advocate for fund investors said Tuesday that regulators fell short - and that tougher sanctions were warranted against a board that regulators say sanctioned special trading arrangements for big-money investors at the expense of ordinary shareholders.

"The punishment was totally inadequate," said Mercer Bullard, founder of the shareholder advocacy firm Fund Democracy, who teaches law at the University of Mississippi. "What we're seeing from the SEC is a failure to hold directors accountable."

In such cases, fund directors should be slapped with injunctions and forced to return the fees they earned in the position, Mr. Bullard suggested.

The eight directors targeted in the tentative settlement deal with Bank of America and FleetBoston Financial are what's known as outside or independent directors. Those directors are supposed to reflect shareholder, rather than management interests, and are watchdogs over company operations.

Securities laws hold mutual fund board directors to a higher standard in some ways than corporate board directors. Experts say that obligation should make it easier for regulators to make cases against mutual fund directors.

But the eight are not being barred from serving on other fund boards, a remedy the SEC could have pursued.

Mr. Spitzer said Monday he has no plans to file charges or further pursue the board members, but said he would be surprised if they are asked to serve anywhere else.

Previously, regulators had charged executives and traders with wrongdoing in improper trading cases and, in at least one situation, required a fund company to force out leadership because of improper trading.

The scrutiny on mutual fund board directors reflects regulators' widening focus.

SEC investigators are examining the role of fund directors in the widespread practice of fund companies' paying fees to brokerage firms in exchange for brokers' steering their clients toward certain funds. Regulators have denounced what they say is a frequent failure of mutual funds to fully disclose these arrangements to unwitting investors, who might be pushed into inappropriate funds by commission-hungry brokers.

At the same time, the agency is proposing rule changes to bolster the independence of fund directors and chairmen - the individuals who oversee all fund operations and the investment adviser firms that manage their funds. The SEC is also looking into whether directors who sit on multiple boards are able to devote adequate attention to their responsibilities.

Fund directors, who are often prominent executives or academics, can earn well into the six- figures if they sit on enough boards.

Fund directors "are investors' first line of defense in ensuring that their interests are being served, that conflicts of interest are appropriately managed and disclosed, and that their money is being managed responsibly," SEC Chairman William Donaldson said recently. "While the SEC shares the investor-protection mission, we cannot be in the boardroom when investors' interest may be compromised. Investors must be able to depend on their directors to stand up for them."

Still, the SEC's track record when it comes to fund board directors is mixed.