Viewpoint: Heartland Fiasco Shows Need for Conflict-of-Interest Rules

The recent collapse of two Heartland Advisors muni-bond funds brought home to many investors the potential danger of investing in high-yield, or junk, bonds. But there's another, perhaps more important, lesson there about the dangers of sweetheart transactions between mutual funds and associated companies.

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Two Muni Funds Pay the Price for Extreme Credit Risk

In September, shortly before their problems became public, the two Heartland funds, (HRHYX Quote)High Yield Municipal and (HRSDX Quote)Short-Duration High Yield Municipal, sold a portfolio of distressed bonds to the State of Wisconsin Investment Board, or SWIB. Heartland and its founder and president, William Nasgovitz, guaranteed SWIB a 20% annual return and return of principal.

It appears the deal was the brainchild of SWIB's chairman, Jon Hammes, who also happens to be on the board of both muni funds. According to published reports, Hammes told Nasgovitz that SWIB might be interested in a deal and told him who to call at SWIB. The deal was consummated at an emergency SWIB meeting on Sept. 27. (Hammes did not return calls this week asking for comment.) ...