If it is true that politics makes strange bedfellows, then financial services scandals make for even more curious divorces.

A peek at the behind-the-scenes wrangling shows that mutual fund boards are making some grave decisions about the fate of scandal-dogged sub-advisors that manage all or a portion of their proprietary funds.

Whether the recently announced divorces are to protect fund investors, or to keep regulators at bay, is certainly up for debate.

Case in point. On Jan. 7, the board of trustees of the Nations Funds managed by Banc of America Capital Mgmt. (BoA) of Charlotte, N.C., announced in an SEC filing that by the end of next month, it will terminate Invesco Funds of Denver and Putnam Investments of Boston as two of the three sub-advisors on the Nations International Equity Fund. Both firms have been implicated in this burgeoning fund scandal. While Putnam has settled with the SEC, Invesco's fate with Federal and state regulators has not yet been determined.

The Nations Funds filing specifically cited both the investigation and loss of personnel as reasons for the firing. Quite unusual was the fact that no replacement sub-advisors have yet been named. While the filing appears to indicate that the board was the one to decide to boot the sub-advisors, "that might explain why there is no replacement sub-advisor at the ready," said Russ Kinnell, director of fund research at Morningstar. "Putnam did legitimately lose some key people on their international side."

"The decision was made by the Nations Funds board of trustees based on a number of factors," said Jennifer Tice, spokeswoman for BoA, who confirmed that the sub-advisor search is on.

While BoA will terminate two firms implicated in the scandal, BoA was itself the first fund advisor to be named as part of New York Attorney General Eliot Spitzer's explosive allegations and charges against hedge fund Canary Capital Partners.

Not only did BoA allegedly allow, but it allegedly facilitated the hedge fund manager's placement of trades well after the 4:00 p.m. trading cutoff -- even supplying trade-order and computer systems to execute swift trades in at least four of its proprietary Nations Funds.

Most ironic of all, is that the same Nations international equity fund for which Invesco and Putnam will be axed as sub-advisors, was one of those four original mutual funds specifically named in Spitzer's complaint.

"The board may be eager to show that it's on the ball, given all of the problems that happened on their watch," Kinnell added.

Banc of America and its board may be at a crossroads deciding which path to take, said Meyrick Payne, partner with Management Practice, a fund board consulting firm in Stamford, Conn. They could decide to internalize the whole investment function and explain that because they couldn't find qualified sub-advisors, they are bringing it in-house, he said. Or, they could simply replace the sub-advisors and proclaim, "See, we've cleaned up our act, and now we're also purging those guilty money managers, he added.

It all comes down to being able to sell those funds in the future, and when sub-advisors are toyed with, it usually has to do with marketing, Payne noted.

BoA is now basically admitting it hired sub-advisor crooks, said Roy Weitz, publisher of FundAlarm.com. On top of that, they turned in poor performance, he added.

"So, shouldn't the Nations Funds' board be looking at taking away the advisory contract from Banc of America because it's obvious that as the advisor, it wasn't successful in hiring sub-advisors?" Weitz asked. "This is a classic case of where the fund directors should be more active in putting the advisory contract out for bid and finding somebody else who can pick sub-advisors better."

The board of AXA Premier Funds Trust, one of the AXA complex of funds managed by The Equitable Life Assurance Society of New York, also recently took extreme measures. On Dec. 12, it fired Alliance as one of the three sub-advisors to the AXA Premier Technology Fund, with Wellington Management Co. of Boston as the replacement. Both Firsthand Capital Mgmt. and Dresdner RCM Global Investors will continue to each manage a portion of the AXA technology fund.

The filing provided no explanation for why Alliance was terminated. A call to Alliance for comment was not returned.

Last fall, Alliance admitted to finding instances of market timing conflicts within its funds. It fired two top fund company executives and suspended two employees, one of which, Gerald Malone, had been the technology portfolio manager for the $3.2 billion AllianceBernstein Technology Fund, as well the manager of other sub-advised technology funds.

This past December, Alliance settled charges with both state and Federal regulators for a total of $600 billion and including a host of reforms including a 20% reduction in fees for the next five years.

While the separation decision may be logical, the two firms' kinship makes it curious, for Alliance is the indirect, majority-owned subsidiary of The Equitable. The firing essentially is tantamount to tossing one of your kids out of the family business.

"We treated this as any other financial decision," said Jeff Tolvin, a spokesman for AXA Advisors. "There are decisions made to add or replace advisors, and these are based on a variety of factors." Those factors, including performance, experience and qualification of the advisor, and the investment fit the fund, "are taken collectively," Tolvin noted. He declined to comment as to whether Alliance's regulatory turmoil weighed heavily into the board's decision.

Orange Jumpsuits

Critics can't help wondering if these fund managers are hoping to distance themselves from companies facing more intense scrutiny -- or even orange jumpsuits.

Keeping track of sub-advisors and even changing them as needed is no easy task, Kinnell said. There is lots of due diligence that must be done, including visiting a proposed sub-advisor, understanding their style and gauging their capacity, he said.

So, when the decision to replace a sub-advisor is made, it's usually for good cause. Add to that list managers who have flown the coop, along with a tarnished reputation.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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