SEC Mutual Fund Settlements


 Beginning in 2003, the SEC and state officials brought enforcement actions for improper trading practices involving mutual funds. Settlements reached by the SEC and state regulators were put into what the SEC call “fair funds” to compensate investors who were harmed by the violation. A list of the fair funds can be found on the SEC website. Distribution plans for three of those funds have been published to date: Pilgrim Baxter & Associates, Columbia Management Advisors and Banc One Investment Advisors. To assist plans entitled to share in the settlements, links to the proposed distribution plans and comments are posted on the ERISA Settlements Clearinghouse website.

For each fair fund, the SEC has appointed an independent distribution consultant (IDC) to establish a plan to distribute the monies from the settlement fund to the shareholders of the relevant mutual fund or series of funds harmed by the late trading or market timing. Proposed distribution plans are published on the SEC website and there is typically a 30 day comment period following publication. The SEC is to finalize these distribution plans within 30 days after the comment period closes, but may extend the period. The 30-day comment period has ended for all of the proposed plans issued to date, so fiduciaries of plans that invested in mutual funds managed by those advisors should begin to think about how the distributions to participants should be made.

On April 19, 2006, the DOL issued Field Assistance Bulletin 2006-1, which provides useful guidance to plan fiduciaries about how proceeds from the fair funds are to be allocated. The plan fiduciaries may use the same method used by the IDC or may use any other prudent allocation method. If distributions to plan participants are not cost-effective, the plan fiduciaries may allocate them to current participants invested in the particular mutual funds or use the recoveries for other permitted purposes, such as plan expenses.