It was unseemly enough when the chairman of the Securities and Exchange Commission, William Donaldson, was obviously competing for the headlines with Elliot Spitzer, attorney general of New York. Now they have resorted to dueling rhetorically in the op-ed pages of The Wall Street Journal and The New York Times, respectively. As one headline put it, "Spitzer and SEC Fight for Turf." Turf involves dirt, if not mud.
 Spitzer landed the first punch, criticizing an SEC settlement with Putnam and announcing that "the public will have to rely on state regulators." For one thing, wrote Spitzer, "the agreement does not address the manner in which the fees charged to investors are calculated." It also does not address the price of tea in China. As Donaldson explained, "We should not use the threat of civil or criminal prosecution to extract concessions that have nothing to do with the alleged violations of the law." Spitzer nonetheless threatens hugely expensive "concessions from the industry" even though the Putnam case is unique to that firm and unrelated to those concessions.
Spitzer has made unproven accusations of unknown significance against only a few other firms in the industry, yet journalists nonetheless keep alluding to an industry-wide "scandal." Donaldson opined that "the industry lost sight of ... its responsibility." That was unfair and untrue. The mutual fund industry consists of many firms, the largest of which have not even been accused of doing anything wrong.
Cartoonist Peter Steiner draws two fellows in a prison cell. One says, "If only it had been the SEC after us instead of the cops." Funny, but wrong. The SEC has no authority to put anyone in jail. Elliot Spitzer does have authority to prosecute actual fraud, but accusations of fraud are easier made in the press than in court.
Trying cases in the press is a cheap way to finance a political campaign and a lucrative way to finance the state government, and it avoids all those annoying legal protections accorded to defendants in a courtroom. "Industry-wide concessions" may also be extracted, which amounts to state prosecutors writing law without asking any elected legislators.
Many of those proposing solutions to the "mutual fund scandal" also happen to be selling something. One proposed solution involves requiring funds to constantly estimate fair value of their shares throughout the day, rather than once at 4 p.m. There is no sure way of doing this, and any method would be an open invitation to lawsuits by investors claiming they were overcharged at the moment they bought and underpaid at the moment they sold. But The Financial Times markets a Fair Value Information Service to mutual funds, as do several others.
The New York Times notes that Eric Zitzewitz, the young economist with by far the largest estimate of the benefit and cost of market timing, "is helping to develop software that would allow funds to keep their prices fresher." We will know if such methods are really superior only if investors are free to choose them or to stick with funds that use today's simpler solution. Meanwhile, Zitzewitz collects favorable media references on his webpage like trophies.
John Bogle, the admirable founder of Vanguard funds, has lately been featured in op-ed pages and interviews engaging in what might otherwise be disregarded as knocking competing firms and touting his own. His remedies naturally tend to involve compelling other fund companies to do what Vanguard does. Bogle has long been an enthusiastic salesman for funds that copy a stock index -- for example, which requires no research and therefore modest fees. The standard sales pitch has been that most mutual funds failed to beat the S&P 500 index. But "most mutual funds" does not mean "most money invested in mutual funds." Most money is in 10 dozen giant funds, 85 percent of which have beaten the S&P 500 handily over the past five years. A Vanguard study shows the average 401K also greatly outperformed the S&P 500. Continued... |