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Prosperity Brings Heightened Scrutiny of Fund Managers

January 16, 1994

NEW YORK (AP) _ The mutual fund business, after enjoying dramatic growth during the last year, now finds itself paying the price of prosperity. A new level of scrutiny is descending on the $2 trillion industry because of its rapid growth and influence in the economy.

Now that nearly 1 of every 4 American households owns a stake in mutual funds, regulators and the press are taking a close look at the men and women entrusted to invest at least $250 billion last year.

A major wake-up call came earlier this month when Invesco Fund Group abruptly fired its star investment manager, John Kaweske, for failure to disclose details of his personal investments. Kaweske wasn’t accused of doing anything illegal and he described Invesco’s objections as highly technical.

Separately, published reports this week said the Securities and Exchange Commission was examining the personal trading habits of Fidelity Investments fund managers. Fidelity declined to comment about its discussions with regulators, but said it would ″cooperate fully with any matters they will pursue,″ said spokeswoman Connie Hubble. The SEC declined comment.

Although no charges have been filed, the general issue raised by these cases is the worry that some fund managers are putting their own financial interests ahead of their customers and the funds they manage.

Instances of fund managers caught for abusing their position for personal gain are rare. Patricia Ostrander, a former Fidelity Investments fund manager, was convicted in 1992 for accepting an illegal payment from Michael Milken in exchange for doing business with Milken’s Drexel Burnham Lambert Inc.

In another 1992 case, Benalder Bayse Jr., a former portfolio manager with First Investors Management Co., paid $19,750 to settle civil charges involving insider trading based on information he allegedly received from Drexel.

A Washington Post report this week about Fidelity Funds prompted U.S. Rep. Edward J. Markey, D-Mass., to ask SEC chairman Arthur Levitt Jr. to examine whether the laws governing trading by mutual fund managers for their own accounts are sufficient.

It’s not illegal for fund managers to invest for their own accounts, although they’re required to abide by a code of ethics set down by the firms, as well as two federal laws, said Doug Scheidt, the SEC’s assistant director for investment management.

Scheidt said he could immediately recall only three instances in the last two years in which the SEC brought charges against investment managers for personal trading violations. The paucity of cases makes it difficult to draw conclusions about the prevalence of improper investment activity by fund managers.

″Either there is not that much or it is very difficult to discover,″ he said.

Several industry analysts said publicity surrounding these two cases is likely to inspire investment funds to review their internal guidelines.

Michael Lipper, president of Lipper Analytical Securities Corp., said he doesn’t ″sense a series of smoking guns″ in the mutual fund industry. But a review and update of managers’ dealing practices wouldn’t hurt, he added.

Markey, chairman of the House subcommittee on telecommunications and finance, described the mutual fund industry as a healthy patient in hearings last summer.

″There have been no big recent scandals to respond to, no great outcries of unfairness from consumers,″ he said.

″Yet the potent combination of inadequate regulatory resources and explosive growth in the industry demand a careful examination of where we are headed, and whether the status quo still suffices.″

Markey said that as of last summer, the SEC had about 125 examiners to perform only limited inspections of money market funds and 100 of the largest mutual fund groups, with some smaller ones thrown in. Markey’s committee is drafting new mutual fund legislation and may hold additional hearings later this year, a committee aide said.

One leading mutual fund manager, Theresa Hamacher, managing director for equity mutual funds at Prudential Investment Advisors in Newark, N.J., isn’t surprised at the growing press and regulatory questions of the industry.

″This industry has been heavily scrutinized and regulated,″ Hamacher said. ″I’m sure there are dusty corners but I think they are very few.″ TICKER

A round of upbeat economic news was released this past week. Inflation remained low, with the government’s producer price index falling 0.1 percent and consumer prices gaining 0.2 percent last month. And industrial production rose 0.7 percent in December ... Paramount Communications Inc.’s. board set a Feb. 1 deadline for the bidding war for the entertainment company and urged shareholders to back a merger with QVC Network Inc.. ... Big restructurings announced: GTE Corp.. plans to cut 17,000 jobs and take a $1.8 billion charge against earnings while Citicorp. set aside $425 million to enhance productivity ... HealthTrust Inc. ., operator of 81 hospitals in 21 states, said it will buy Epic Holdings Inc. ., another hospital company, for $1 billion. COMING UP

Stock markets will be open but government bond markets closed Monday. in recognition of the Martin Luther King Jr. holiday; the November merchandise trade report and the Federal Reserve’s survey of regional economic conditions is set for release Wednesday.; a report on December housing permits and personal income in the third quarter are due out Thursday..

End Adv for weekend editions Jan. 15-16.