General American Settles With SEC for $3.3M

General American Life Insurance, a division of MetLife, has settled with the Securities and Exchange Commission for $3.3 million, on charges it failed to prevent late trading of mutual funds in one of its variable insurance products.

In addition, former Senior Vice President William Thater is paying $163,000 for allegedly allowing a wealthy client to place the 79 late trades in 2002.

"By permitting a wealthy family to late trade, William Thater elevated the interests of a few select individuals over other investors," said Linda Chatman Thomsen, director of the Commission's division of enforcement. "Whether it's late trading of mutual funds directly or those that are part of variable insurance products, the Commission will continue to hold individuals and entities accountable for wrongful practices that unlawfully favor some investors over others."

Campos Leaving SEC Splits Controversial Issue

The departure of Roel Campos from the Securities and Exchange Commission, one of two Democrats on the Commission, could sidetrack a controversial proposal to give shareholders a greater say in electing directors, according to The Wall Street Journal.

Campos, who is leaving the agency next month, voted in favor of the shareholder-friendly proposal, leaving the Commission split on the issue.

The controversial push "went from iffy to negligible with Campos"' exit, said John Olson, a corporate governance lawyer with Gibson, Dunn & Crutcher.

Last month, the SEC approved two strikingly different proposals on the question of proxy access. Both were 3-2 votes with SEC Chairman Christopher Cox as the swing vote. One proposal, backed by the Republican commissioners and business, would allow companies to refuse any election-related shareholders proposals.

The second proposal, supported by Democrats, would permit shareholders with 5% stakes to propose changing company rules in a way that would allow shareholders to nominate directors.

Cox stated that he favors the proposal that would give shareholders access and that he wants the issue finalized by next year.

There are other changes on the horizon at the SEC, as well. Commissioner Annette Nazareth's term expired this year. Under the law, she is able to continue to serve as long as 18 months after her term expires. Commissioner Paul Atkins' term expires next year.

Luis Aguilar, a partner at McKenna Long & Aldridge, is a possible candidate to replace Campos, according to people familiar with the situation. Other senators on the committee are reviewing potential candidates.

Most Firms Risk Fiduciary Liabilities in 401(k) Plans

Most companies that offer retirement plans to their employees risk fiduciary liabilities, according to Fiduciary Risk Management, a new subsidiary that CPA firm Habif, Arogeti & Wynne has launched specifically to address the issue. In fact, of the approximately 10,000 labor-related lawsuits last year, 59% were ERISA-related.

"Most companies are convinced that they have completely complied with the law and are unaware of potential danger," said Jessica R. Flores, managing director of Fiduciary Risk Management. "This is especially the case for Fortune 1000 companies where large assets, combined with unknown noncompliance, make them perfect targets for class-action lawsuits.

"Most companies expect to hear about problems or issues from their investment consultants or plan service providers," she added. "However, their interests are quite different from those of the company's. These organizations are first and foremost in the investment business, and they earn money from investment management fees and products the companies pay for. That means their primary focus is on investment performance, not retirement plan fiduciary complaint."

Fiduciary Risk Management will work with clients to develop complete fiduciary programs inclusive of measurement tools to ensure ongoing compliance and investment education for participants. The company will also define at-risk groups among participants.

Market Concerns Prompt Investors to Flee Funds

Amid the market turmoil and mortgage concerns, investors are fleeing equity and bond funds and moving into money market funds and U.S. Treasuries, The New York Times reports.

While all mutual fund sectors have been hard hit, some of the worst casualties are small-cap value, real estate and high-yield funds. In the past month, small-cap value funds have tumbled 7.5%, real estate investment trusts have fallen 6% and high-yield funds have given up 2.3%.

"It's pretty unusual to see this kind of drop in small-cap value funds," said Russell Kinnell, director of fund research at Morningstar. "In past downturns, those funds have owned stodgy, boring little businesses and stocks that do not have a lot of price risk. But this time, they owned banks, mortgage insurance companies-and that was really the problem."

According to AMG Data Services, in the week ended last Wednesday, $439 million flowed out of high-yield bond funds, the ninth week of outflows, while $36.2 billion went to money market funds, the largest amount since December 2005.

Nasdaq Launches Private Stock Market for Wealthy

Nasdaq has launched a new, private stock market with 500 listings called the Portal Market for super-wealthy investors with $100 million or more in assets, the Washington Post reports.

However, unlike other stock markets where listed companies are public and subject to federal regulation, those that list on the Portal Market will remain private.

This comes at a time when private equity firms are making it difficult for mutual funds and other institutional investors because the private equity firms are taking public companies private. In fact, more money, $162 billion, was spent on acquisitions by private equity firms last year than on initial public offerings on Nasdaq, the New York Stock Exchange and the American Stock Exchange.

"One of the problems that business faces in America today is what I would call short-termism,'" said Howard S. Marks, chairman of Oaktree Capital, which is listed on a private market organized by Goldman Sachs. "There's a lot of expense and complication associated with being a public company today. Now it is possible to gain most of the advantages of being public while sidestepping the disadvantages."

Nasdaq predicts that within only a few years, initial private offerings will by far exceed initial public offerings.

Exec Shuffle at Fidelity Concerning Advisers

With the departure of Ellyn McColgan from Fidelity Investments as head of distribution earlier this month, financial advisers and analysts are wondering about the firm's future, the Boston Herald reports.

"It's a bit unsettling," said certified financial planner and principal of Collins Financial Advisers Neil Collins. "I'd be happier if it was clearer who will be in charge over the next generation."

Louis Harvey, president of Dalbar, agrees, saying that the departure of McColgan and Chief Operating Officer Robert Reynolds "certainly would give advisers pause to think" about recommending the firm's products to investors.

Magellan Outperforming 83 Percent of Growth Peers

After making a name not only for Fidelity Investments but the entire mutual fund industry in the 1980s, the $42.8 billion Magellan Fund is, once again, beating its peers under the management of Harry Lange, The Wall Street Journal reports. So far this year, it has beaten 83% of its growth peers, returning 9.9%-a full 6.3 percentage points ahead of the S&P 500. In fact, 63% of Fidelity's funds are beating their peers so far this year, compared to only 46% a year ago.

And despite the market's tremendous volatility of late, Lange said he is optimistic the fund will weather the storm, "particularly regarding the growth companies in which the fund is invested. High-quality companies that can continue to grow earnings ultimately are rewarded by the market." In addition, Lange said he thinks the volatility will be short-lived.

Fidelity certainly needs to be able to boast of strong performance, since it's been losing market share to Vanguard and American Funds.

"The whole conversation about Fidelity and market share is tied directly to the performance of Magellan," said John Bonnanzio, editor of Fidelity Insight.

Mutual Funds Fend Off ETFs, Hedge Funds, SMAs

Despite threats from hedge funds, exchange-traded funds and separately managed accounts, mutual funds continue to grow in popularity, Investors Business Daily reports. Assets in mutual funds today are $11.39 trillion, nearly three-fold from $4.46 trillion in 1997. And in 1997, 14% of household financial assets were in mutual funds, and that rose to 25% in 2006.

"In dollars, mutual funds far outgrow other products," said Chip Roame, managing principal at Tiburon Associates.

The number of funds also continues to grow. In 1997, there were 6,684 funds, and today there are 8,023.

Nonetheless, mutual funds should still look over their shoulder, for the number of ETFs has grown from 19 in 1997, with $6.7 billion in assets, to 526 with $485.9 billion in assets today. Whereas there were 2,990 hedge funds in 1997 with $368 billion in assets, today, there are 9,800 hedge funds with $1.7 trillion in assets.

And as far as separately managed accounts are concerned, their assets are now at $900 billion, double what they were in 2002.

Legg Makes Unorthodox, $44M Investment in Ning

Legg Mason recently took a $44 million venture capital investment in Ning, a social-networking startup looking to compete with Facebook and MySpace, The Baltimore Sun reports.

Although Ning and Legg Mason would not comment, it is believed that Legg Mason star Portfolio Manager Bill Miller is behind the deal, since he has often made unorthodox investments. Furthermore, he is chairman of the Santa Fe Institute, which studies "natural, artificial and social systems."

This isn't the first time, either, that Legg Mason has invested in a technology company. It has a large holding in Convera, which allows companies to create specialized search engines.

Dr. Death' Forecasts Calamitous' Recession

David Tice, manager of the $897 million Prudent Bear Fund and also known as "Dr. Death," believes the U.S. economy is on the verge of the most severe recession since World War II, The Australian reports.

Tice points to the slumping housing market, the subprime loan mess and the tightening of credit on Wall Street. As a result, he expects housing prices to fall another 30% by next year, earnings to crumble, GDP growth to stall, bankruptcies to rise and the subprime crisis to spread to the entire credit market, including mergers and acquisitions.

"People have got to open their eyes to the risk out there," Tice said. "There are calamitous times ahead, and some naive people are going to be badly burned.

"We think credit market deterioration is very, very significant, and the Federal Reserve is going to be limited in how it can respond. If you look at what's been going on, how can anyone be bullish?"

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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