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Portfolio > Mutual Funds

Baker/Oxley Bill Would Sever Management of Hedge F

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WASHINGTON (–Both houses of Congress are considering legislation to halt abuses in the mutual fund industry, and despite some consensus passage may snag on the question of whether an individual should serve simultaneously as portfolio manager of both a hedge fund and a mutual fund.

The House of Representatives passed its version of the act, the Mutual Fund Transparency and Integrity Act of 2003, also known as HR 2420, by the suspense-free margin 418 to 2, on Nov. 19.

The gist of the bill, drafted by Rep. Richard Baker (R-La.) and marked up in late July by the House Financial Services committee, originally was to direct the Securities and Exchange Commission to promulgate rules that require transparency as to mutual fund fees and costs, inclusive of soft-dollar arrangements, and to strengthen the independent directors of fund management firms.

Rep. Baker is the chair of the capital markets subcommittee within Financial Services. The chair of the full committee, Michael Oxley (R-Ohio), offered an amendment to the Baker bill Nov. 18 to update it in light of subsequent revelations. That amendment included the provision prohibiting the same portfolio manager from serving two masters. It also required the SEC to issue clearer rules encouraging fair-value pricing, i.e. to eliminate the “stale price” problem that investors, including hedge funds such as Canary Capital Partners LLC, Secaucaus, N.J., have exploited .

Rep. Oxley knew that Rep. Baker would not oppose such amendments to his bill because Rep. Baker had himself proposed them in testimony before the Senate Governmental Affairs Committee’s subcommittee on financial management, Nov. 3.

Rep. Baker said then that he still regarded HR 2420 as an important first step, but in light of the recent events he wanted to go further.

Any arrangement in which the same person manages a portfolio for both a hedge and a mutual fund, he said, “creates opportunities for unfair allocation of securities transactions. It has been widely observed that such an arrangement might create incentives for a manager to allocate the best investment ideas to the hedge fund, because hedge fund managers collect lucrative fees … based on performance. Even worse, it apparently provided at least one manager with the opportunity to market time the very mutual fund he was managing, on behalf of the hedge fund.”

It was the Baker bill with the Oxley amendments that passed the House Wednesday.

Dan Michaelis, vice president, corporate communications, of the Securities Industry Association, said Nov. 19 that many of the SIA’s members have some concerns about the severing of portfolio management duties provision. “We are taking a careful look at it,” he said, because the Securities Industry Association believes that there are some beneficent consequences of allowing portfolio manager to combine the two roles. The Securities Industry Association’s member firms include investment banks, broker/dealers and mutual fund companies.

The passage of this act by the House, he said, is only the first step on the long road. Very different proposals now are under consideration in the Senate, and whatever bill eventually does pass in the Senate will have to be reconciled with the Baker/Oxley bill. “I don’t even want to speculate,” what final form legislation might take, Mr. Michaelis said.

The president of the Securities Industry Association, Marc E. Lackritz, testified before the Senate Banking Committee on Nov. 18 regarding the Senate bills under consideration. He did not address the issue of portfolio-managerial conflict in that testimony. He did say, though, that the Securities Industry Association supports action by lawmakers and the SEC to address the issue of stale pricing.

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