Political contributions by fund industry soar

Feb 6, 2006 @ 12:01 am

By Frederick P. Gabriel Jr.
Aaron Siegel

BOSTON - The mutual fund industry, led by Fidelity Investments, has finally discovered an age-old secret for making friends and influencing people in Washington: money.

Facing a slew of key legislation and struggling to recover from a loss of face in some political circles, the $8.9 trillion fund industry has spread big bucks around Capitol Hill. Employees at the nation's 10 largest fund companies made $1.3 million in political contributions during the 2004 presidential-election-year cycle, a nearly 240% increase from $391,938 in contributions by employees from the same companies during the 2000 cycle, federal records show.

Of that, more than 80% of the contributions were made during the nearly 16 months since the trading scandal was unveiled.

The scandal, which first became known to the public in September 2003, led to more than $2 billion in fines and mandatory fee cuts involving dozens of fund companies. It also brought the wrath of regulators and legislators down upon the fund industry.

In and of itself, the increase in political contributions doesn't point to wrongdoing.

But it does paint a picture of an industry that got caught with its pants down and is now scrambling to gain enough political muscle to shape public policy to serve its own business interests, industry observers say.

No surprise

"I think it's definitely something we need to keep our eyes on," said Geoff Bobroff, a fund consultant in East Greenwich, R.I., of the jump in contributions by fund company employees. "The last thing we want to start doing is buy favors that we couldn't otherwise earn."

The increase in contributions doesn't surprise S. Prakash Sethi, president of the International Center of Corporate Accountability Inc. in New York and a professor at the Zicklin School of Business at Baruch College, also in New York.

"All businesses have a very well-defined motive when it comes to why they make campaign contributions," he said. "That motive usually involves making sure their interests are met by lawmakers."

The mutual fund industry downplays any connection between the scandal and the increase in contributions by employees.

"This industry has been built for 60 years on strong regulatory oversight and prudent legislation," said Edward Giltenan, a spokesman for the Investment Company Institute, the fund industry's powerful trade group in Washington. "We welcome the scrutiny … We work to make sure that regulation and legislation make sense for mutual fund shareholders."

The increase in political contributions comes at a time when Congress is grappling with many proposals involving the fund industry. Some of those proposals, if passed, could result in billions of dollars' worth of new business for many companies.

Among them are maintaining lower tax rates on capital gains and dividends, making permanent higher contribution limits to tax-deferred savings accounts and establishing automatic enrollment in 401(k) plans.

Many fund companies, including Fidelity, T. Rowe Price Group Inc. of Baltimore and The Vanguard Group Inc. of Malvern, Pa., have also lobbied aggressively for the Pension Protection Act, which was passed by the House of Representatives in December. Under the proposal, fund companies would be permitted to provide shareholders with direct advice.

"Look - there are far more issues facing investors today than there have been in the past," said Brian Mattes, who was tapped to oversee Vanguard's government affairs efforts in 2004.

Mr. Mattes, who is also a spokesman for the company, spends much of his time in Washington meeting with lawmakers and their staff. Last year, Vanguard, the second-largest fund company, formed a political action committee to make contributions to federal political candidates.

"A lot of us firms had representation in Washington even before the scandal," Mr. Mattes said.

The mutual fund industry remains a relatively small player inside the Beltway.

So far in the 2006 election cycle, which includes 2005 and 2006, political contributions by top 10 fund company employees total $257,297, according to opensecrets.com, which tracks campaign spending.

Sen. John Sununu, R-N.H., is the largest congressional recipient of that money, according to that website. Mr. Sununu, who is a member of the Senate Banking Committee, received $14,500 in contributions. All of those funds came from the pockets of employees of Boston-based Fidelity.

He was a vocal opponent of a Securities and Exchange Commission rule change requiring mutual funds to have independent chairmen.

And none other than Edward C. "Ned" Johnson III, Fidelity's chairman and chief executive, offered the most resistance from the mutual fund industry's side of the table.

"Ned Johnson is an amazing capitalist, and if anyone should have a voice in matters of national importance with congressmen, it should be him," said Don Phillips, a managing director with Morningstar Inc. in Chicago.

That said, Mr. Phillips is critical of Mr. Johnson's decision to use his political clout to attempt to thwart independent chairmen on fund boards.

"It saddens me that that would be the issue he would champion," Mr. Phillips said. "I feel like he is squandering his political capital on a trivial issue." In fact, Mr. Johnson and Fidelity are fast gaining clout in Washington. Executives at Fidelity, the nation's No. 1 fund company, stand out for their political largesse.

During the 2004 election year cycle, Fidelity's employees contributed $823, 230, which accounted for more than 62% of the total giving by employees at the top 10 companies over the two year period.

In 2004 alone, Mr. Johnson made $24,000 in contributions, versus $6,675 in 2000. His daughter, Abigail, president of Fidelity Employer Services Co., which administers 401(k) retirement and other corporate-benefit plans, made $20,750 in contributions in 2004, up from nothing four years earlier. Fidelity spokesman Vincent Loporchio declined to comment on the increased contributions by employees, though he stressed the broad array of products at the firm.

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