Rules Bind Fund Managers Investors Should Ask Companies If They Have Adopted Guidelines

Does your mutual fund adhere to the highest ethical standards? Or are fund managers growing fat and happy at your expense?

These aren’t idle questions. There was a minor scandal in the fund industry last year when Invesco Funds Group in Denver fired a star manager for violating company rules on personal trading.

In theory, a fund manager could buy a stock for his own account, drive up the price by buying another large block for his fund, then sell his shares. Fund investors could be stuck with a lousy stock put into the fund for the wrong reasons.

The possibility led the industry’s trade group, the Investment Company Institute, to establish voluntary ethical guidelines last year to prevent conflicts of interest. Most fund companies have adopted the key rules, the ICI says.

The measures prohibit fund managers from investing in initial public offerings, restrict their purchases in private securities placements and require blackout periods during which they cannot buy or sell securities traded by their funds. Managers should disclose their personal holdings to superiors and get approval before making personal trades.

Fund companies don’t have to disclose in their prospectuses whether they have adopted the guidelines. But they’ll probably tell anyone who asks, since it’s a serious regulatory offense to mislead investors, says ICI spokesman John Collins. If you invest through a broker, ask him, says Collins. If you buy shares directly from the mutual fund, ask the fund’s representative.

“Ask, ‘What are your policies on personal trading?’ And ‘Have you adopted the new personal trading standards?”’ Collins says.

“Ask, ‘How are you protecting me against abusive personal trading by fund managers and others?’

“I think there’s no reason at all for an investor to be shy about asking that kind of thing.”