BUSINESSWEEK ONLINE : JULY 31, 2000 ISSUE
FINANCE Commentary: A Raw Deal for Fund Shareholders For six decades, the Investment Company Institute has articulated the mutual fund industry's positions on issues for Congress, regulators, and the public. Like most trade groups, the ICI runs on dues paid by companies in the industry. In the case of ICI, a good chunk of those dues comes right out of mutual fund coffers. How much? The ICI won't say, but a new lawsuit against the association asserts that half of the dues comes out of shareholders' pockets. Now, shareholder activists Linda Rohrbaugh and Richard Krantz are suing to recover that money and put it back into the funds. Their complaint: that the ICI is run for the benefit of fund companies, not fund shareholders. Ronald Rubin, the plaintiffs' attorney, estimates that investors gave $40 million to the ICI over the past three years alone. DODGY RESPONSE. While $40 million may seem trivial in a $7 trillion industry, the suit has great symbolic significance. Sure, the interests of fund managers and shareholders converge on issues such as higher contribution limits for retirement accounts and better tax treatment for fund investors. But often they clash over costs, control, and disclosure--and in those matters, the ICI usually backs management. For instance, in the controversy over whether fees are too high, the ICI argues that investors solved the problem by moving their money to lower-cost funds. That response, however, fails to get at the fundamental question of whether management companies are charging too much. As an association supported by shareholder dollars, the ICI should balance the interests of management and shareholders. ''The ICI is by fund companies, for fund companies, and their incentive, their compensation--everything is to favor fund management,'' says Don Phillips, CEO of fund-tracker Morningstar Inc. The ICI declined to comment on the lawsuit or the issues raised. The voice of the individual investor is virtually nonexistent at the ICI. Currently, 39 of the 45 members of the ICI's board of governors work for fund-management companies. The other six are ''independent directors'' of member funds. Such directors are not employees of fund companies, but they are not required to be shareholders, either. The lack of investor representation is particularly ironic because the ICI's ''Best Practices for Fund Directors'' study recommends that two-thirds of the directors on fund boards be independent. While declining comment, an ICI spokesman did refer BUSINESS WEEK to the 1999 annual report, which details some of the group's shareholder-friendly positions: increased funding for the Securities & Exchange Commission, privacy protection for shareholder information, and restrictions on personal investing by fund managers. Yet there are cases where the ICI's positions appear to be at odds with shareholders'. In 1997, a Maryland judge ruled that the independence of three directors of Scudder Kemper funds could be questioned because they served on several Scudder fund boards. The ruling was seen as a victory for shareholders. The next year, the ICI successfully lobbied the Maryland legislature to change the law in a way that nullified the judge's ruling. HARD TO PROVE. Nor is this an isolated incident. In 1998, the ICI soli-cited the SEC to make it more difficult to get shareholder proposals on proxy statements. The group also sought to prohibit proposals to fire advisers or buy back shares of closed-end funds. More recently, the ICI has argued against a government recommendation to provide personalized fee disclosure to individual investors. Neither side wants to publicly discuss the lawsuit. However, the plaintiffs' prospects are not good. They'll have to prove that the ICI does nothing for shareholders and is therefore just an extension of fund-management firms. That doesn't mean their cause has no merit. Shareholders and management interests have diverged enough to warrant changes in the ICI's board and its policymaking practices. The ICI should either increase representation for shareholders or give them back their money. By Lewis Braham Staff Editor Braham writes about mutual funds. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					INTERACT E-Mail to Business Week Online

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