Mutual Funds represent one of the more popular and fastest growing forms of investing today. As of year-end 2003 mutual funds assets worldwide reached an astounding $14 trillion. This figure includes $7.4 trillion in the U.S. fund market, and $6.5 trillion in 38 other reporting nations.
According to statistics released by the Securities Commission of the Bahamas, to date there are over 700 Funds with assets under management totaling some $130 million.
What’s the attraction? They allow investors to pool their resources, providing access to professional fund managers and diversification among different asset classes.
More than any other financial product, these vehicles have brought shareholder capitalism to the masses. In the United States alone, investors now have over 8,200 mutual funds to choose from, and in Great Britain about 2,000. Half the households in America have money in one or more. Savers in continental Europe, who traditionally kept their money in banks, started buying mutual funds in earnest about ten years ago.
A black mark on the industry
An industry often described as ‘solid’, ‘squeaky clean’ and ‘dull’ was embroiled in illegal trading scandals, which were brought to light in 2003 by Eliot Spitzer, the New York Attorney General.
Charges against several leading mutual fund firms, investment banks and hedge funds were filed alleging practices such as engaging in “market timing” and illegal late trading of mutual fund shares. These practices have benefited an elite group of investors and fund managers at the expense of millions of small investors, with conservative estimates totaling some $5 billion.
In the Bahamas, we have also been plagued with mutual fund challenges.
Over the last few years…
Cardinal International, the second largest mutual fund administrator in the Bahamas, with assets under management totaling some $2.5 billion and 68 funds announced that effective December 31 it will no longer remain in business. This will affect the jobs of some 60 persons.
Moore Pak Fund Services, a Bahamas-based fund services firm has also recently become embroiled in an alleged investment fund scandal involving more than $1 billion in investor funds. It is alleged that Moore Park decided to move the Alto Funds into liquidation after they were unable to calculate their Net Asset Value (NAV).
Fortis Fund Services. In March 2003, Fortis Fund Services (Bahamas) Limited made a decision to cease its Bahamian mutual fund administration business.
The recent loss in excess of $3 billion and several hundred jobs will and has negatively impacted the economy but more importantly those Bahamians employed by those companies, as they can and have earned on average upwards of $40,000 per annum, resulting in diminished standards of living for many.
Who is responsible?
In the United States, New York Attorney General Spitzer stated that the Securities Exchange Commission (SEC), the governing regulatory body with direct oversight of the mutual funds industry, neglected increasingly obvious problems in the mutual fund industry, and in his own words he accused the agency of being “asleep at the switch.”
Can the same be said of the Securities Commission of the Bahamas (the Commission)? Has their lack of regulatory oversight and supervision in some form or the other contributed to the recent mayhem in our mutual funds industry?
While we commend the Commission for the recent passing of the new Investment Funds Act, 2003, described as the catalyst that will place the regulatory infrastructure of The Bahamas at the cutting edge of modern investment fund administration, we have to ask: Does the Commission have adequate resources ﾖ technical, human, and/or financial ﾖ to properly oversee and supervise our regulatory environment?
Checks and balances
As regulators of the Investment Industry, these mutual fund administrators by law were required to submit proper documents including NAVs, and other financial reporting requirements. Were these reports properly examined and flagged by the Commission? The Commission by law can and does conduct on-site inspections of its licensees/registrants. Were they carried out? If irregularities were properly noted, could they have somehow been avoided? The Commission is also responsible for monitoring the activities of its licensees/registrants to ensure compliance with provisions in the legislation. What happened, if anything?
Many registrants are also complaining of the long delays with regards to the Commission’s approval of Standard Funds. As a result of new provisions in the Investment Funds Act, 2003, these Funds which were once allowed to be licensed by Unrestricted Mutual Fund Administrators can now only be approved by the Board of the Commission. Prior to the passing of the Act, the Board reviewed these applications for approval once per month. However, even with the additional licensing responsibilities, there has been no increase in scheduled Board meetings. These bureaucratic delays cannot be advantageous to the sector’s growth.
Is there a viable solution?
In the United States, the scandals mean lawsuits and possibly oblivion for some companies. For regulators, both the SEC and the Investment Company Institute have proposed tough rules to end the recent fraud scandal:
Among the issues highlighted for possible legislation or regulation:
* Board Independence: Mutual funds Board Chairman to be independent.
* Regulatory structure: Creation of a separate federal oversight board financed by assessment on the industry, as the scandal underscored the inability of an overworked and under-funded SEC to regulate funds
* Competitive bidding. Mutual fund investors are nearly assured that high fees will reduce their long-term returns; legislation will require contracts for managing a fund’s assets be occasionally put out for competitive bids.
The Bahamas
While we admit that there are no quick or easy fixes, we have previously advocated the consideration of a super regulator in some form or the other. One recommendation outlined as it relates to the present mutual fund dilemma: The obvious benefits of economies of scale arising from the move to a central support service; a combined management structure; and, an amalgamated approach to standard-setting, authorization, supervision, enforcement and tackling financial crime.
Hillary Deveaux, Acting Executive Director of the Securities Commission, admitted in an interview (The Guardian, March 2, 2004) that regulatory deficiencies exist particularly in relation to frequent overlaps in reporting requirements and onsite inspections. This is largely due to the fact that many of the institutions licensed as banks and trust companies by the Central Bank are also licensed or registered in some other capacity by the Securities Commission.
While we agree that there is no single blueprint as financial markets are constantly changing, what we do recommend is a regulatory body that is independent yet accountable and headed by a Senior Financial Executive supported by Commissioners who are responsible for various disciplines in addition to inspection, competition etc. The entity should be well resourced (both human and technical).
As the opening statistics dictate, the mutual funds industry is a very lucrative business. If we are to successfully compete and retain our global share of this economic pie, we must address and correct the present inefficiencies in our regulatory framework in a timely manner. There are many jurisdictions competing for the business (point in case: Fortis Funds Services relocated to the Cayman Islands).
For those who ask, “Can we afford the costs for adequate financial and technical resources to properly oversee and supervise our securities environment,” our answer: How can we afford not to?
The Nassau Guardian
