Over in the US of A, the mutual funds scandal continues to rumble on. In this case, a new article "Regulators overstep with mutual fund trustees" brings out one of the conundrums in the structure that is in place. In short, the Bank of America, as part of its $375 million settlement with Elliot Spitzer's office, also decided to sack the Trustees of its funds.
Now people are wondering how it is possible for a manager to sack the Trustee. As the trade group wrote:
''By accepting the proposition that Bank of America has the capacity to settle charges by causing the replacement of mutual fund trustees, the Commission would be suggesting that Bank of America, not the trustees, controls the funds, ..."
Well, it's a good point, isn't it! Reading the article in full and considering every action and event, it is clear that Bank of America, the manager, and the regulators, New York Attorney General and the SEC, have all quite happily ignored the Trustees. Until it is time to sack them, of course.
Trusts are nominally owned by their Trustees, and the Trustee is in charge of all management and governance decisions. He can't be sacked by the manager, but in the Trust documents, there is often provision for a Trust Protector. This person can generally sack the Trustee, and do all sorts of other things, as laid out in the Trust document. Or, at the least, there will be a way to sort out these issues, if only because Trustees are often old, and check out of their own accord.
So, skipping that storm in a teacup, what was the substance of the Trustees' claim to control the management and to guard the funds? Here it is:
".... In a meeting in May 2002, [the Trustees] voted to take action against short-term traders, called market timers. These traders buy and sell shares of foreign funds overnight, to lock in quick profits at the expense of other investors. The board instituted a 2 percent penalty fee for anyone holding shares less than 90 days, in order to dilute any profits from timing.
"But at that same meeting, according to Spitzer's allegations, Nations Fund managers persuaded the trustees to give one elite client a free ride. According to the minutes of the meeting reviewed by Spitzer's investigators, Bank of America wanted to let a hedge fund, Canary Capital Partners, market-time at will, without paying the fees. The eight trustees present at the meeting (two missed the session) agreed to the arrangement, Spitzer said.
Whoops-a-daisy! The Trustees gave a free pass to Canary Capital, which was the market timer that started the whole schamozzle. So the more likely future for the Trustees is that they have to face criminal or civil proceedings for all that money that they let slip by. It may be that being sacked when they can't be sacked is the best thing that ever happened to them.
What I don't understand about this part is why people expect these appointments to actually work. Of course, if you put a Trustee in place, he might honestly do his job to look after the assets. But, more than likely, he won't. Why should he?
The only reason he would do the job properly is if he was monitored. Nobody was monitoring these guys, and the Managers were allegedly conspiring with them to let the fraud continue. Well, of course! There was too much money involved not to try and steal it.
Which is why when I designed the 5PM I started out with the principle that nobody does the job unless monitored. And nobody monitors like the owner (forget auditors, they're just more highly paid versions of the Trustees). So the most important person in the 5PM is the 5th party - the user. Or, the owner, as they like to call themselves. And the most important part of the structure is not who is doing what, but how they tell the user what they are doing.
And monitor they do - when given a chance, and when given some explanation of how they are the only ones really standing between their assets and the crooks that are pretending to guard them.
Addendum 2004.09.06 SEC scrutinizes trustees of mutual funds
Posted by iang at July 18, 2004 08:49 AM | TrackBack