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Is the SEC looking for a needle in a mutual-fund haystack?

Posted by: Lauren Young on June 29, 2006

One of the good things about my job covering mutual funds at BusinessWeek is that I get to meet with a lot of fund managers. One of the bad things is that I’m pitched meetings with dozens of fund managers every month. There’s simply not enough time in the day to meet all of them.

But I’m almost always glad when I find the time to sit down with someone. Two days ago a top-performing fund manager—someone whose funds are A-rated by BusinessWeek—came by with some surprising news. About two weeks ago, the Securities and Exchange Commission knocked on his door, and asked for all of his trading, performance, and holdings data.

As far as upstanding citizens go, this guy seems to be pretty legit. And he isn’t concerned too much. From time to time, the SEC conducts what is known as a “sweep” in different areas to get educated about various topics, such as soft dollars, by targeting many fund companies for information. “The SEC was very blindsighted by the market timing scandal,” the president of Midwestern fund company told me. “They really want to be sure they are on top of stuff that’s going on that they don’t know about.”

So what’s the SEC looking for this time around?


While an SEC spokesman declined to comment, several sources say this sweep stems from a case involving Bridgeway Capital Management of Houston. In September 2004, Bridgeway reached a settlement with the SEC under which it agreed to repay investors in three funds $4.4 million of improper performance fees. The way the fees work is that funds pay a higher portfolio-management fee when returns beat a benchmark, such as the S&P 500. But the payout is lower when returns lag behind the benchmark.

Other fund companies have been targeted for overcharging investors with performance-based fees. (These fees are actually pretty rare in the mutual-fund business, although they are more standard in the hedge-fund world.) According to a legal source I spoke to, the SEC may be looking specifically at companies whose performance fees are calculated by a third party.

This is all very interesting, and I'm glad the SEC is looking at fund companies with a fine-tooth comb, given all the shenanigans that went on with market timing and late trading. But for a small fund company, having to order up all of this data can be quite onerous and time-consuming. The fund manager I spoke to said it took about a day-and-a-half to get everything together for the SEC. His shareholders probably wish he was spending that time minding their money.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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