Mutual fund corporate governance continues to receive attention in the media these days, much of it due to the high level scrutiny levied against the entire industry by the Attorney General of New York, Elliot Spitzer.

A featured guest on CBS 60 Minutes Wednesday night, July 7, 2004 along with the original whistle blower of the recent mutual fund late trading schemes scandal, he described how incredulous he and his staff were to learn that this was a very common practice.

A man with a mission, he had tough words for the US Securities and Exchange Commission, whose mission it is to regulate the overall securities industry, including mutual funds.

Late trading in mutual funds works like this: generally, investors who put in orders before 4 p.m. to buy or sell mutual fund shares get a price based on that day?s net asset value, which in turn is based on closing stock prices. If the order comes in after 4 p.m., the transaction is at the next day?s value.

Bank of America and Edward Stern of Canary Partners had a different idea. The bank gave Stern a terminal that allowed him to enter orders until 6.30 p.m or even later at another institution, still using the 4 p.m. price.

If Mr. Stern knew that prices were likely to rise the next day, that meant that he could buy at a low price and sell at the high one. The mutual fund itself could not invest the money at these lower prices with the result that all other shareholders in the fund were the losers.

For most mutual funds, betting on a decline in prices is not an option, but certain Bank of America managers went way out of their way to give Mr. Stern priority treatment along with detailed, current information on the funds? holdings (not available to other mutual fund shareholders).

Making more money, they then sold him derivative securities that let him take short positions in the basket of stocks owned by the fund.

As a result, Stern could buy shares of the fund and simultaneously short the stocks in it. Then, if he realised at 6 p.m that the market might fall the next day, he could sell the fund shares he owned, leaving him with a net short position.

The next morning, he could buy back the fund shares at a lower price.

Prosecuted, Mr. Stern was convicted and fined; Bank of America paid a large fine. In the ongoing saga, so far, damaged investors have received nothing.

Next stop for Spitzer ? Mutual Fund Transparency Tests.

Attorney Spitzer is now focusing on obscure & misleading marketing, and the sheer lack of uniformity in disclosure of fees charged by mutual fund companies.

He will seek to impose mandatory disclosure of conflicts of interest and standardisation in fee compensation. Figuring out the real cost of owning a mutual fund today is difficult for the investment professional and bewildering to the average investor.

In some fee structures, long-term performance of the fund is undermined.

What are the common fees?

Sales commissions, front end loads? are deducted immediately from the amount invested and range from three to eight percent, sometimes more. The financial sales person is paid a portion of this commission, the investment firm keeps the rest.

Deferred sales charges, back end loads ? are deducted each year from the mutual fund earnings usually about one percent a year for five to seven years.

Note, however, that the financial salesperson is paid immediately by the mutual fund company. He/she does not wait for his money.

A common excuse about deferred sales charges is that ?well, the fees come out each year on, say your pension fund and since you won?t be using it for a while, it does not matter?.

Yes, it does matter ? a lot ? see the charts. No load mutual funds do not charge either front or back loads, redemption fees and so on. Generally, they also have higher administrative fees (to make up the difference). Vanguard mutual funds are number two in the world, both in performance and in low cost expense ratios. There is a reason for that.

Incentive fees are charged by hedge funds and others for superior performance. No one minds paying more to receive a much higher rate of return, but they better deliver consistently.

Administrative and expense fees are the amounts charged to actually run the mutual fund, pay the managers, provide reporting, etc. Wrapper fees are wrapped around mutual funds that may already assess fees in the fund itself. The wrapper is charged for management of the portfolio of mutual funds.

Foregone earnings (opportunity cost) are the amounts paid in fees to the mutual fund that could have been invested elsewhere. In the accompanying chart, a picture is worth a thousand words. No matter which mutual fund cost calculator that I used, the deferred sales charge fee structure showed the lowest returns and the highest costs, compared to no load and front end loads.

The hedge fund is there to demonstrate how high a rate of return a hedge fund must make to justify an incentive fee of 15 percent a year.

Chart assumes all funds performed the same over the same time frame, except the hedge fund.www.sec.gov or www.nasd.com to use their cost calculators and see how your mutual fund fees measure up.

The message, shop wisely and watch the fees. Don?t pay for what you

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