Chicago fund tracker Morningstar is recommending that investors steer clear of Federated Investors and Fremont Funds, two firms that have yet to settle with regulators and that have been relatively tightlipped about wrongdoing and remedies.

"Federated has a lot to answer for, but it seems it would prefer not to," Russ Kinnel, Morningstar’s director of fund analysis, writes in a recent "Fund Spy" column. Kinnel also said "we wouldn’t send [either firm] a dime until they’ve settled with regulators and made clear how they’ve rebuilt their compliance systems and righted their listing corporate cultures."

Kinnel’s main gripe with the firms is the lack of information they have provided, giving investors and analysts little to be reassured about. He says the firms have provided few details in an attempt to stay out of the headlines. However, the lack of information is only part of the problem.

Federated had market-timing deals in place in exchange for sticky assets, and also permitted late trading. It had also stopped monitoring frequent trading activity for several months starting in the spring of 2003. Federated hasn’t disclosed whether senior management was aware of or approved the timing deals, Kinnel notes. He also is concerned that nobody has been held accountable for the "huge lapse in compliance" at the firm. He compares the faulty compliance structure at Federated to those at Nations Funds and Columbia Funds.

Fremont entered into timing deals, but the details are sketchy, as the firm has been mum with the exception of one statement posted on the firm’s Web site that was simply updated with a few paragraphs once more revelations surfaced. Kinnel said its "encouraging" that those responsible for the timing at Fremont have been expelled from the firm, but Morningstar will have "greater certainty when regulators have signed off on those remaining at the funds." However, Kinnel added that it is "disappointing" that investors in funds subjected to frequent trading and potentially late-trading have not been informed.

Throughout the scandal, Morningstar has been a vocal critic of funds that have misbehaved, often recommending that investors sell, consider selling, or steer clear of certain families or complexes when buying mutual funds.

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