Cornerstone Equity Advisors of New York, which has managed to survive as interim adviser of the five Fundamental Funds since September, seems likely to be approved as the permanent adviser this month.
In mid-February, Cornerstone on behalf of the funds, filed a preliminary proxy statement with the SEC announcing it intended to hold its long-awaited shareholder meeting in March, though no specific date was announced. Shareholders of record as of January 14, 1999 are being asked to approve Cornerstone as the funds' permanent investment adviser. They are also being asked to approve the payment of advisory fees earned by Cornerstone, as the interim adviser, from November 30, 1998 to the present. Cornerstone is expected to finally win approval as the permanent advser, said a source who has followed the funds' saga.
While the Fundamental Funds, which have gone through three advisers in less than a year, may finally enjoy some stability with a permanent adviser in place, it seems likely that controversy surrounding the funds will continue.
Along with the planned shareholder vote, the February proxy revealed that Lance Brofman, a principal of the funds' original adviser, Fundamental Portfolio Advisers, has arranged to be a consultant to the new adviser. FPA was fired as the fund's adviser in part because of the fund board's concerns about an SEC investigation of Brofman and the adviser's other principal, Vincent J. Malanga.
Under the arrangement disclosed in the February proxy, Brofman will be paid 0.50 percent per year in the event the combined net assets of the funds exceed $150 million. Total net assets currently stand at $180 million. But that arrangement may be in jeopardy.
A final determination of an SEC administrative proceeding initiated in September, 1997 against Brofman and Malanga is pending and expected this spring. The SEC charged Brofman and Malanga knowingly committed a series of misdeeds when they were advising the Fundamental Funds. The charges include misrepresenting the interest-rate sensitivity of the Government Income Fund and marketing the fund as a safe investment when in fact it was loaded with derivatives. Although Brofman expects the charges to be dismissed, he says that if the SEC finds fault with his actions, the regulator could prevent him from serving in his new consulting capacity with Cornerstone.
A principal at Cornerstone was not available for comment, nor was the lawyer to the funds.
As previously reported by MFMN (Dec. 21, 1998) Brofman has still other ties to the new adviser. Cornerstone has entered into a software licensing and consulting arrangement with Brofman. As has been reported, Cornerstone, not the funds, will pay $30,000 a month for modeling programs used in conjunction with the funds' large population of market timers and software to assure compliance with fund rules and regulations. The February proxy reveals that Brofman had originally sought $62,000 a month but that the board refused to approve that amount, saying that it was excessive. The agreement will remain in effect for 12 months, with the proviso that the independent board members can extend the contract for no more than two years.
While disruption may yet arise in the funds relating to Brofman, it appears that one potential source of complications has been eliminated. Brofman, a fund shareholder as well as the funds' original adviser, says he has withdrawn his own proxy statement, filed in January, that accused Tocqueville Asset Management, the funds' second adviser that replaced FPA, of mis-handling the funds' portfolios while acting as interim adviser, thereby harming shareholders. The Brofman proxy also called for shareholders to demand a special meeting to remove and replace the remaining independent board member.
Brofman says he has withdrawn his competing proxy because several of the original issues have now been resolved. Specifically, $169,697 placed in escrow under an earlier order of the Fundamental board has been released from escrow. That amount included $62,834 in management fees previously earned by FPA.
"FPA itself no longer has a (financial) interest in the outcome," said Brofman.
Brofman's withdrawal of his proxy eliminates a possibly obstacle to the clearance of Cornerstone as the funds' advisers.
Cornerstone was handed the advisory contract for the five fixed-income funds last September 28, 1998 after the board of directors clashed with Tocqueville over whether to limit the activity of market timers in the funds. The dispute led the board to fire the adviser which had replaced the original adviser. The funds' original independent board members purposely allowed the funds' long-standing advisory contract with Fundamental Portfolio Advisers to lapse last May.
Although Cornerstone actually began serving as the new interim adviser on September 29, it served without any compensation for 60 days, according to a source close to the agreement. It was not until November 30, 1998 that the SEC granted Cornerstone approval to become the new interim adviser. Shareholders must approve a change of permanent advisers. The 120-day period for that interim advisory contract began on November 30.