Friday, March 25, 2005

John Bogle: Has Your Fund Manager Betrayed Your Trust?

Keynote Speech byJohn C. Bogle, Founder and Former CEO, The Vanguard GroupBeforeThe American Institute of Certified Public AccountantsPersonal Financial Planning ConferenceLas Vegas, NV, January 5, 2004

Ever since the first of the mutual fund scandals came to light shortly after Labor Day 2003, the circle of fund organizations involved has continued to grow. To date, more than a dozen firms have been implicated in some form of late trading (illegal manager behavior) or international “time-zone” trading (unethical manager behavior), with many of the charges brought by New York Attorney General Eliot Spitzer, Massachusetts Secretary William Galvin, and the Securities and Exchange Commission already settled, resulting in substantial and well-deserved financial penalties imposed on the managers.

Make no mistake about it. Most of the firms involved in the scandals are major industry participants. Their aggregate fund assets of nearly $1.2 trillion represent nearly 20% of the industry’s $7.2 trillion total. As the scandals have unfolded, investor reaction turned from incredulity to revulsion, and then to self-defense, with rising share liquidations at the firms that were affected. Even the firms that have so far received only subpoenas for information seem cautious about declaring their innocence, for it turns out that virtually all 401(k) transactions take place long after each day’s 4 p.m. cut-off time for executing orders. What is more, one of the two prime clearing-houses for these transactions has been forced out of business. And there may be more enforcement actions to come.



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