Sounding the Alarm on Mutual Funds

Regarding the trend of large fund companies acquiring small funds, is it too hard for small fund companies to compete due to the cost of Sarbanes Oxley regulations? Should they be eased?

If a small fund produces good performance, it should be able to accumulate a sizable asset base, and the owners of the fund management company will make a lot of money, even under Sarbox. If Sarbox compliance costs are a problem for a small fund, the fund probably isn't producing good performance, and perhaps it shouldn't exist anyway.

As for start-up funds, well, the entrepreneurs just need to be prepared to dig a little deeper into their pockets and pay for those Sarbox compliance costs. If a new fund is good, the management company can still look forward to 40% or 50% profit margins, and in many cases a lot more. They can afford to pay for Sarbox, and I don't feel the least bit sorry for them.

Eliot Spitzer was kicked upstairs to governor in 2006. Is the mutual fund industry happy to see him go?

Spitzer had pretty much made his point by 2006 and moved on, so I don't think the fund industry was all that concerned with him anymore. But yes, I'm sure that they are still delighted to see him otherwise occupied.

What are your predictions for 2007? Any mergers, scandals or new regulations on the horizon?

I think the SEC will take action on the fund side of the Bisys scandal. The independent director rule will die a quiet death. It's about time for a front-running scandal, with fund managers discovered to be buying stocks for their personal accounts ahead of their funds.