Targeting Mutual Funds

Over the next several years, one can expect to see a familiar pattern repeat itself. As happened with defense contractors, commercial bankers and then with health care providers, federal and state regulators will direct their sights at investment advisors and mutual funds. What was traditionally an administrative issue for the SEC or state could become major civil enforcement litigation. Fines could easily skyrocket into multimillion-dollar figures. Prosecutors – armed with statutes that prohibit false statements, fraud, theft of honest services, and others – will threaten criminal sanctions in what had previously been regulatory actions under the Investment Company Act of 1940, the main statute governing mutual funds, and related securities laws. The mutual fund industry will see prosecutors target common practices that the industry thought acceptable, or at least inevitable.

There is a large variety of mutual funds, ranging from modest investment pools to multibillion-dollar funds. Investment advisers range from well-known companies with sophisticated compliance programs to small operations that mirror the ethics of the few key individuals who run them. As New York Attorney General Elliot Spitzer, a leader in the enforcement efforts against investment banks, said at a law school forum in mid-2003: “If you think the amounts involved in the investment banks were big ($1.4 billion global settlement), wait until you see what happens with mutual funds.” Counsel representing investment advisers subject to the 1940 Act need to reexamine their compliance efforts and prepare themselves for outside review. Regulators' inquiries will most likely examine two general categories, fund administration and marketing.