Investors Deserve an Intolerant SEC

Before the offending ads ran, an article had appeared in the TheStreet.com noting the fund's heavy reliance on hot IPOs, and the fund directors had been briefed on this issue. With red flags waving left and right, the directors did nothing, yet the SEC's message was that they would not be held accountable. Ironically, one of the directors was subsequently selected by the Mutual Fund Directors Council, an SEC-sponsored group, to appear on a conference panel addressing board oversight of fund performance.

In the 1990s, directors of funds managed by Louis Navellier and Donald Yacktman attempted to exercise their legal right to fire the manager. (Check out these stories: Navellier Says He's Getting His Fund Back, Yacktman, Let Us Direct Your Funds, Please!) and What Now? Sizing up the Yactkman Fracas.)

Mr. Yacktman responded by threatening the "independent" directors with financial ruin and reminding them that their insurance policy would not cover claims made against them by Mr. Yacktman. Mr. Navellier ultimately sued the independent directors personally. Other than authorizing the Mr. Yachtman directors to use fund assets to solicit proxies, the SEC chose to stand by the sidelines and treat these confrontations as internal corporate battles that did not implicate federal law or policy.

Again, the SEC's message was clear. Independent directors who stand up to fund managers do so at their own personal risk. The SEC's apathy regarding fund directors' responsibilities apparently extends to other boards, as the directors of Enron, Worldcom, Tyco and other companies, unlike these companies' executives, have thus far come away unscathed.

For over 30 years, federal law has authorized the SEC to sue a fund's managers and its directors for charging excessive advisory fees. The SEC also can sue a fund's directors if they fail to request and evaluate, and the fund's manager if it fails to provide, information necessary to evaluate the advisory fee. The SEC has never brought either claim, apparently believing that, in the last three decades, no fund has ever charged an excessive fee, and no fund board has ever failed to conduct a complete evaluation of the advisory contract. Of course, neither possibility is plausible. The SEC has simply decided not to exercise its authority.

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