April 14, 2004
I am author of How to Select and Use Mutual Funds published by CCH, Inc., and I frequently speak and write on mutual fund investing issues. I will be making comments about a number of SEC proposals to regulate the mutual fund industry. In this particular comment, I want to address the manner in which the SEC regulates the industry.
Three years ago I was Personal Representative for two estates of deceased clients of mine. One of them held investments in a Franklin mutual fund that I was attempting to liquidate to settle the estate. After supplying the mutual fund with a copy of the death certificate, an original copy of my Letter Testamentary, and a written request to redeem shares in the fund, I met stiff resistance from the fund company to comply with my request. I supplied all the documentation they requested of me, but it was clear they were not going to liquidate the shares and transmit the proceeds.
I complained about this behavior to Franklin personnel as far up the food chain as I could go and was told that neither the SEC or the NASD had direct supervision over mutual funds. Regardless, I wrote complaint letters to both the SEC and the NASD but never received a reply from either organization.
I reiterate that I provided all the documentation Franklin requested. It was only after contacting a good friend who was also a Franklin Board member that I received quick action on my request.
My comments, therefore, are two items:
1. First, mutual funds are apparently unaware of just what agency has regulatory oversight over mutual funds and investors are certainly unaware of this information as well. I recommend that prospectuses contain information on how to make complaints regarding questionable mutual fund behavior, and that one specific department within the agency be charged with investigating complaints. A generic letter to the SEC ends up in the cosmos.
2. The manner in which the SEC addresses oversight lacks credibility. It appears, to this 27-year professional in the investment industry, that as long as the issuer of a security discloses a practice, it is then up to the investor to decide whether or not to make the investment. In other words, a caveat emptor attitude prevails at the SEC. Instead of the SEC simply adopting rules to ban or regulate an activity, the SEC seems to believe that as long as an issue is disclosed, the SEC is satisfied. Clearly, disclosure and rules do not prevent fraud, but SEC personnel need to change the mindset that disclosure by issuers is more important than illegal activity.
Mutual funds do not seem to know the difference between legal ethics and moral ethics, and given the choice of acting in their own best interest, they will ignore the latter.
James E. Grant, CPA