Founders Asset Management of Denver, adviser to the 11 Dreyfus Founders Funds, has fined tuned its Code of Ethics which governs when and how employees may make personal securities trades. The disclosure was made in a prospectus amendment filed with the SEC Sept. 1.
The firm's code of ethics was changed to bring it more in line with the rules of conduct and code of ethics currently being used by Founder's parent company, Mellon Financial Corp. of Pittsburgh, according to a Founder's spokesperson. Mellon, which is also the parent to the Dreyfus Corporation of New York, bought the Founders mutual fund and investment management unit in 1998.
While Founders has had a code of ethics for several years, the firm's newly-revamped code of ethics now prohibits employees from investing in initial public offerings in all but a few circumstances. It also bans portfolio managers and analysts from engaging in short-term trading - buying and selling the same security within 60 days - and requires that any profits made from short-term trading be surrendered.
Founder's, in conjunction with Mellon, has also established an Investment Ethics Committee which has oversight responsibility for personal trading by employees. Formerly, any apparent trading violations were reported to the president of Founders rather than a committee. Founders' executives were not immediately available to comment on the changes.
September 1 was the latest of three deadlines for mutual funds to adopt formal codes of ethics and file them with the SEC.
In August 1999, the SEC announced its intention to adopt several significant amendments to its personal investing rule for investment advisers. The changes sought to prohibit fraudulent, deceptive or manipulative acts by investment advisory firms or funds' employees in connection with their personal securities transactions.
The amendments took effect Oct. 29 of last year but the SEC allowed a phase-in period.
The SEC now requires each fund to disclose in either its registration statement or statement of additional information, the existence of a formal code of ethics which is filed with the SEC. A majority of a fund board's independent directors must also approve a fund's code of ethics or any substantive changes made to it. Further, at least once a year the fund's board of directors must be given a written report describing known violations of the code and any sanctions the adviser has imposed against employees.
The SEC is also now requiring that funds or investment advisers review and pre-approve the purchase by any employees involved in investment decisions, of an initial public offering or private placement security. While the SEC stopped short of altogether banning fund employees from investing in IPOs or private securities, it does now require that each fund adviser maintain a record of pre-approvals for these transactions.
The changes to the code of ethics at Founders comes two years after Mellon first faced charges of ethics violations at its Dreyfus mutual fund unit. But according to a Founders spokesperson, the changes were not related to Dreyfus' ethics problems.
In June 1998, a class-action lawsuit was filed in New York by Spector, Roseman & Kodroff of Philadelphia. The suit charged that Michael Schonberg, a Dreyfus portfolio manager at the time, engaged in "front-running," - buying securities for a personal account, then purchasing the same securities for the mutual fund. Schonberg had managed the Dreyfus Aggressive Growth Fund and the Dreyfus Premiere Aggressive Growth Fund. The lawsuit is currently in the pre-trial stage of discovery, said a spokesperson for the law firm representing various plaintiffs.
Dreyfus fired Schonberg on May 10 of this year, according to Patrice Kozlowski, a Dreyfus spokesperson. Kozlowski declined to comment further.
In a related violation, the SEC in May settled an administrative action instituted against Dreyfus and Schonberg charging that in 1995 and 1996, Schonberg unfairly allocated "hot" IPOs to the fledgling Dreyfus Aggressive Growth Fund to boost performance. The SEC and the New York Attorney General also charged that Dreyfus advertised the fund's performance without disclosing that the over-weighting of IPOs were responsible for much of the fund's stellar performance.