Securities and Exchange Commission
official declined to say Monday whether the SEC has examined the
American Heritage fund's unusually high rate of trading and its practice of trading almost exclusively with a broker-dealer owned by the fund's manager.
But, speaking hypothetically, those are the kinds of things that might pique an SEC inspector's interest, says Gene Gohlke, associate director of the SEC's
Office of Compliance, Inspections and Examinations
detailed these practices by American Heritage in a
story on Monday that also noted the fund is the year-to-date's top performer with a return of 62.2% through Jan. 20.
The story also noted that American Heritage's manager, Heiko Thieme, has had a paid consulting relationship with two companies in the fund's portfolio.
"Our goal is to conduct at least one inspection of a fund group every five years, and I can't comment on when we last inspected a specific fund group," says Gohlke.
But a manager trading almost exclusively with his own broker-dealer and one who has business relations with stocks owned by his fund would make inspectors "pay particularly close attention," he says.
Thieme acknowledges his unusual ways break fund-industry tradition. But the practices are disclosed in shareholder materials on file with the SEC, he points out.
From any angle, the small and famously erratic $6 million fund is an oddball. The average stock fund has more than 100 holdings and a turnover ratio -- the percentage of holdings that have changed in the past year -- of 89%, according to
American Heritage typically has about a dozen holdings, and almost all the fund's assets are invested in
, two obscure health care stocks. Despite such heavy concentration, the fund's turnover ratio topped 1,000% in each of the past two years because Thieme used 10% to 20% of the fund to daytrade, a practice he says he stopped last year.
Gohlke says inspectors might be interested in where Thieme went to do all that trading. The fund's most recent statement of additional information, or SAI, says in the year ended May 31, 1999, that 94% of the fund's brokerage commissions ($444,766) went to
, a broker-dealer owned and operated by the fund's manager.
"Funds do use related brokers, but it's unusual to be even in the 75% range. Anytime a fund has dealings with an affiliated entity like this broker-dealer, I think it catches the inspection staff's attention. I can't tell whether that's the case here," says Gohlke.
Gohlke says most funds pay between 4 to 6 cents per share for their trades. Thieme says his brokerage charges the fund about twice that amount. According to Gohlke, an SEC inspector might wonder whether the manager has considered using electronic communication networks, or ECNs, which could execute the fund's trades for about 2 pennies per share, despite what Thieme says are modest-sized orders.
And then there's the unusual relationship between Senetek, ADM Tronics, and
, a business-consulting concern owned by Thieme that has advised Senetek for free and ADM Tronics in return for stock warrants, according to Thieme. Those warrants currently have no value, he says.
"I would say that's out of the ordinary. It's disclosed, that's a plus, but even then, most fund companies don't want to take on the appearance of conflict of interest," says Gohlke.
Most industry attorneys consulted on the fund's strange ways said full disclosure of these practices in the fund's prospectus and SAI could help Thieme avoid conflict-of-interest questions. But Gohlke is careful to point out that disclosure isn't a cure-all.
"Disclosure certainly helps, but it doesn't cure everything, because some things are prohibited," he says. For instance, managers generally aren't allowed to trade with their own brokerages when a better price and lower commission are available elsewhere.
He adds that a fund's prospectus isn't "approved" by the SEC. The agency merely reviews the document's disclosures to ensure it suits the agency's guidelines.
Compared to most boilerplate fund filings, American Heritage's is a page-turning thriller. Even Gohlke was intrigued, shyly asking the name of the fund in question at the end of an interview.