The Wall Street Journal-20080204-Investing in Funds- A Monthly Analysis- Investor IQ -- Quiz- How Well Do You Know--- the Regulatory Cops-
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Investing in Funds: A Monthly Analysis; Investor IQ -- Quiz: How Well Do You Know... the Regulatory Cops?
Full Text (1231 words)Every community needs cops on patrol.
Investing is no different. When it comes to mutual funds and related investments, however, the police come from all angles, with varying degrees of power -- and it isn't always clear who has jurisdiction.
Who has the final word on what's right and what isn't? The Securities and Exchange Commission has increased its scrutiny of hedge funds, but can it send people to jail?
At a time when regulation is a hot topic with investors, check out how much you really know about fund cops:
1. The four key laws that apply to fund companies were enacted in what two decades?
A. 1910s and '20s
B. 1930s and '40s
C. 1960s and '70s
D. 1970s and '80s
ANSWER: B. They were the Roaring '30s and '40s, as far as fund regulation goes. The four main laws all trace to those decades, starting with the Securities Act of 1933. The flurry of legislation that followed the 1929 stock-market crash was meant to protect investors through more regulation and record-keeping. The Investment Advisers Act of 1940 is the one that requires mutual funds to register with Uncle Sam.
2. The SEC can send corrupt mutual-fund managers to jail, right?
A. Yes
B. No
C. In some cases
ANSWER: B. The SEC has only "civil" powers. In other words, it can sue people, levy fines (sometimes large ones) and kick people out of the securities industry. But when it's time to turn a case into a criminal matter, the Justice Department or state prosecutors have to get involved. The SEC often will work hand in hand with the criminal investigators.
3. Who or what is Finra, and why should fund investors care who or what it is?
A. Last name of the newest commissioner to join the SEC, who has promised to crack down on hedge funds
B. Name of a 3,000-employee European fund group under pressure from Italian authorities
C. An illegal technique to wash the trading records of fund companies
D. A 3,000-employee self-regulatory group that oversees 5,000-plus U.S. brokerage firms
ANSWER: D. It stands for Financial Industry Regulatory Authority, and if the name isn't as familiar as NASD or NYSE, it's just a matter of time. Finra, in fact, was created last year by the merger of the NASD and a regulatory arm of the New York Stock Exchange.
Its wide-ranging activities include bringing civil cases that allege wrongdoing at brokerage firms, sometimes involving sales of mutual funds, and settling disputes between investors and Wall Street using arbitration and mediation.
An undiscovered gem, for many investors, might be the regular Investor Alerts that Finra posts on its Web site, finra.org. Many warn about investing scams. Brightly written and easy to understand, they cover everything from misleading "free lunch" seminars, to bogus "China" stocks to post-Katrina stock scams.
4. Who is Andrew "Buddy" Donohue?
A. An SEC official
B. The first hedge-fund manager prosecuted, in 1935
C. An investor leading a campaign to deregulate mutual funds
D. The judge in the "market timing" cases in New York
ANSWER: A. Mr. Donohue, a former lawyer with Merrill Lynch Investment Managers and OppenheimerFunds Inc., is head of the SEC's Division of Investment Management. That's the SEC division that regulates investment companies including mutual funds, closed-end funds and ETFs. The 57-year-old Mr. Donohue says, "I love my job, and it's been just a great experience for me so far."
5. An idea to allow mutual-fund companies to send offering documents to investors over the Internet was proposed by whom?
A. E*Trade Financial executives
B. Microsoft's Bill Gates
C. Warren Buffett
D. The SEC
ANSWER: D. Good information is as good a weapon against fraud as anything else, and one of SEC Chairman Christopher Cox's initiatives has been to get investors more information electronically. Late last year, the SEC voted to propose allowing fund companies to make fund information available on the Web. The public can comment on that proposed rule until the end of February.
6. Which came first, the opening of Disneyland or the founding of the mutual-fund industry's main trade group, now known as the Investment Company Institute?
A. Disneyland
B. The ICI
ANSWER: B. The ICI wins it, magically, by 15 years. The trade group was established in 1940 and Disneyland opened in 1955.
The ICI isn't a hard-nosed cop, of course; it's mainly known for its lobbying function on behalf of the fund companies, and for collecting industry statistics. But one of its core missions is to encourage adherence to "high ethical standards," so it has a role in keeping mutual funds clean.
When it was formed in 1940, the mutual-fund group was based in New York and called itself the National Committee of Investment Companies. Back then, assets for the fund industry totaled $2.1 billion. Now there's $12 trillion. It became the ICI in 1961 and in 1970 moved to Washington.
7. In what year did the series of "market timing" cases start?
A. Last year
B. 2005
C. 2004
D. 2003
ANSWER: D. Yes, it has been five years since prosecutors started bringing cases involving market timing -- which involves the short- term darting in and out of a mutual fund's shares, a practice generally forbidden by the funds.
8. Eliot Spitzer, when he was New York state's attorney general, helped build his financial-crime-fighting reputation on the mutual- fund trading scandals. Upon his exit, his office had tallied up how much in fund-industry punishment -- counting fines, restitution and fee cuts?
A. $10 million
B. $30 million
C. $1 billion
D. $3 billion
ANSWER: D. Still, despite the large bite out of the industry's hide that Mr. Spitzer's office helped to take, the investigation ended with a key setback: In 2005, former Bank of America Corp. broker Theodore Sihpol was found not guilty of improperly trading mutual funds. Mr. Spitzer is now New York's governor.
9. A hot regulatory topic has been whether mutual-fund boards should have more "independent" directors, including the chairman. A few years back, the SEC ordered that at least 75% of directors be independent of the fund-management company. A federal court blocked the move, saying the SEC didn't adequately address cost. What percentage of fund companies meet the 75% goal?
A. 25%
B. 50%
C. 75%
D. 90%
ANSWER: D. According to the ICI's latest survey, independent directors make up 75% of boards at 90% of fund companies.
As to whether an independent chairman is the way to go, some fund firms don't want it mandated, saying independent directors should themselves determine the right governance structure.
10. The SEC's Mr. Cox held up a book at a recent meeting to make a point about his idea to help investors. What was the book?
A. "XBRL for Dummies"
B. "War and Peace"
C. "Trading Places"
D. "Harry Potter and the Chamber of Secrets"
ANSWER: A. It was the XBRL book, about how to write computer code for making data on the Web interactive. (For geeks, XBRL stands for eXtensible Business Reporting Language.) He was emphasizing his belief that interactive data -- like tagging material in fund documents so it can be called up easily in computer searches -- would make it easier for investors to compare mutual funds.
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Mr. Power is a news editor for The Wall Street Journal in South Brunswick, N.J. He can be reached at [email protected].
