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Funds Were Mutual, Sharing of Data Wasn't

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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.

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.

The SEC is now expected to require fund companies to disclose their fund holdings four times a year, and the industry has dropped its opposition to such a move. The proposal is still pending. But this change does not address the issue of selective disclosure. The SEC needs to provide more guidance in this area, fund analysts and executives say. Regulators, however, may take the position that sharing of portfolio information in exchange for investments or other inducements violates securities laws.

Fund companies also need to review their internal policies. Strong, for example, now says it will not share portfolio information with some investors without making it public to all. Some executives say funds should be required to ask their directors for permission to share information not available to the public and disclose these practices to their shareholders.

Of course, not all sharing of portfolio information is wrong, say fund analysts, securities lawyers and others. They make the distinction between disclosing fund holdings to people like consultants and fund trackers, who use it to advise people on their fund choices, and those who use the information to make money by providing it to investors to trade on or trading on it themselves.

“While most fund companies do an admirable job of disclosing fund holdings to their shareholders, many also provide access to fund holdings more rapidly, more frequently, or both to fund trackers, advisers, consultants or other firms with which an adviser has a business relationship,” two Fidelity executives wrote.