Strong Capital gave a favored client repeated access to portfolio information on some of its mutual funds, regulators say. Pilgrim Baxter, a unit of Old Mutual, also shared information about fund holdings that was not available to the public with a brokerage company, which then passed it on to its clients, regulators say.
The mutual fund scandals have exposed a double standard in the fund industry. Many fund companies have been willing to share information about what their funds own with a chosen few: important clients, prospective investors, brokers and clients. A third of large mutual fund companies recently queried by the Securities and Exchange Commission say they handed out portfolio information to consultants and others in ways that raised concerns with regulators about whether some investors were able to benefit improperly from the information.
At the same time, though, the fund industry has vigorously resisted attempts to make such information known to their shareholders and the public at large. “It’s the ultimate hypocrisy on the part of the industry,” said Mercer E. Bullard, a former SEC lawyer who now heads Fund Democracy, an advocacy group for fund shareholders.
Regulators say that the behavior may have gone beyond hypocrisy. The use of this information to trade in and out of mutual funds and engage in other investment techniques has been at the heart of the funds scandals. Investors used the information, provided by the fund company or by another party, for their personal profit, often to the detriment of fund shareholders.
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The mutual fund industry has long understood that knowledge about which stocks a fund owns is valuable. For years, it vigorously opposed efforts to require funds to make public their portfolios more than twice a year. Some fund complexes like the American Funds and Fidelity, a unit of FMR, say that no matter what others have done, they have zealously guarded this information from outsiders.