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The Observer Paper 10/31/14

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Home arrow Opinion arrow Our View arrow INVESTORS DESERVE HONESTY, INTEGRITY



In yet another case of corporate misconduct, several mutual fund management firms have been implicated in questionable trading practices. These tactics include market timing and late trading, which hurt small investors by raising costs and lowering returns. This is a clear betrayal of mutual fund shareholders. Their confidence in America's capital markets has been shaken once again.

Over the past 30 years, mutual fund investing has become an integral part of many people's financial lives. The Wall Street Journal reports that more than 95 million Americans representing more than half of all American households currently own mutual funds —often through a 401-K, IRA or a 529 College Savings Plan. Americans hold a combined $7 trillion in mutual fund assets.

The fundamental premise of mutual funds is that every shareholder — large or small, corporate or individual investor — shall be treated alike and earn the same rate of return. Sadly, industry watchdogs, the Securities and Exchange Commission and the National Association of Securities Dealers have done a poor job looking out for the interests of small investors. Amazingly, the SEC reports that its conducts on-site mutual fund inspections only once every five years!

If the public is to regain confidence and trust in the mutual fund industry, we must have increased regulation, tougher enforcement and legislative action to enforce compliance.

One of the most annoying aspects of this latest scandal is the unmitigated greed and the lack of business ethics exhibited by portfolio managers and industry executives. It's not like they're in desperate straits. Many of those accused of wrongdoing are millionaires who run mutual fund companies that generate huge profits. The average business owner in downtown La Grande or Enterprise might turn a 7 percent or 8 percent profit. According to Bizstats.com, the average profit margin of companies that manage mutual funds is 56 percent!

Here in Oregon, Treasurer Randall Edwards acted quickly and decisively to terminate an investment relationship with Strong Capital Management. Strong was the manager of one of the mutual fund programs offered through the Oregon 529 College Savings Network. Strong has been accused of improper and unethical trading practices. Thousands of Oregonians have invested over $134 million in a plan administered by Strong. We applaud Edwards and the Oregon College Savings Board for this action. We are, however, concerned that another mutual fund management company in the Oregon 529 Network, Federated Investors, has acknowledged that it, too, may have been involved in late-trading or market-timing. A full review is in order.

This latest scandal creates an opportunity for the College Savings Board to review the criteria used to select mutual fund companies. In addition to low fees and expense ratios and a proven track record of performance, the honesty, integrity and business ethics of these companies need to be examined thoroughly. Edwards and the Board must take action to restore Oregonians' trust and confidence in the Oregon College Savings Plan.


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