Mutual Funds Must Ban Personal Trading

Time for some Strong medicine, and I don't mind the pun at the expense of Richard Strong, founder and chairman of Strong Funds and now, it seems, market timer. With the revelation that even the top dogs played against their clients at these mutual funds, it is time for the industry to adopt my rules on personal account trading.

Years ago at my old hedge fund, I thought I detected that someone was placing orders for his personal account when he should have been working for the big fund, the enchilada that paid for us to work there and that demanded 100% of our attention. I fired him, summarily, and then instituted two rules.

Rule one: Before you make a trade for your personal account, you have to clear it directly with me.

Rule two: I will always say no.

That's right, I banned personal trading. I didn't want anyone distracted. I had no personal account to trade in. If you had an idea, and the idea came to you while you were in my employ, the idea belonged to the partners.

If an employee didn't like that set of rules, I would tell him that there were thousands of places that didn't care about this stuff and that he should go to work for one of those.

What could my employees do with their money? I said they could become members of my fund, or they could invest it "passively." But any time they ever touched it to move it, I had to know it.

It's amazing what two simple rules will do. They will keep you in business and focused.

Now that I see the abuses people are capable of in this mutual fund world, I urge that world to adopt my rules. Ban trading in personal accounts. There is no place for it. All ideas must be devoted to the partners or the clients. They are paying you.

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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS by clicking here. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to [e-mail]. Listen to Cramer's RealMoney Radio show on your computer; just click here. Click here to buy Cramer's latest book, "You Got Screwed!" Click here to order Cramer's autobiography, "Confessions of a Street Addict."