BOSTON — Just because the Enron Corp. and market-timing scandals have led to greater disclosure requirements doesn’t mean that some mutual fund companies aren’t still burying some doozies in their regulatory filings, according to Russel Kinnel, director of mutual fund research for Morningstar Inc.
For example, the Sept. 30 annual report filed for The Frontier MicroCap Fund listed Thomas A. Siesennop as an independent director. But a later footnote indicated that he also is the brother-in-law of Amy Siesennop, who is vice president of the fund’s adviser, Freedom Investors Corp. in Hartland, Wis.
“We checked it out regarding rules of independence for directors, and [Mr. Siesennop] is considered independent,” said Ms. Siesennop, who also serves as a director on the fund, as well as its president, treasurer, chief compliance officer and anti-money-laundering officer.
Another eyebrow-raising filing involved the now-defunct Shaker Fund. In June, the fund’s board informed shareholders that it planned to convert the fund’s A, B and C shares into intermediary shares and that there would be no tax consequences.
Five months later, another filing informed the shareholders that they were in fact taxed. To make matters worse, news of the tax was buried on the last page of a 42-page filing — the first part of which was filled mainly with numbers.
The Shaker Fund used to be run by Shaker Investments LLC in Beachwood, Ohio.
Edward Hemmelgarn, president of Shaker Investments, denies that shareholders incurred a tax hit related to the conversion. They did take a hit, however, that was related to the fund’s closing.
“I think there was a mistake in the wording of the filing,” Mr. Hemmelgarn said.
Hiding mistakes
Regardless, “A lot of these, to me, kind of seem like variations on either, ‘Oh, by the way, we messed up, and we’re going to hide that,’ or, ‘Oh, by the way, we’re gouging you, and we’re going to hide that,’” Mr. Kinnel said.
When it comes to disclosure, “what you see from some of the more obscure firms is following the letter [of the law] while avoiding the spirit as much as possible.”
For example, a filing on the QCM Absolute Return Fund (QARFX), advised by Quixote Capital Management LLC in Greenwood Village, Colo., showed that the fund’s auditor found controls lacking at Unified Fund Services Inc., the Indianapolis-based firm responsible for performing back-office tasks such as record keeping.
QCM Absolute Return co-manager Jerry Paul, who was Chicago-based Morningstar’s fixed-income manager of the year in 1999, said that the fund, launched in December 2005, may present “a unique challenge” for Unified, because it does merger arbitrage.
The report by the independent registered public accounting firm, attached as an exhibit to the filing, found that control procedures weren’t in place “to ensure that interest income, interest expense and
dividend expense on short sales related to short sale broker activity were properly recorded.”
The report also found that control procedures “to ensure compliance with regulatory requirements relating to custody of securities” also were lacking.
Terrance Gallagher, treasurer of the Unified Series Trust, which includes QCM Absolute Return, concurred with the accounting firm’s findings and said steps have been taken to correct the problems.
Although the auditors found “some serious breakdowns in procedures,” the disclosure was made in “probably the most obscure of mutual fund filings,” Mr. Kinnel said.
“There’s always been an element of that with fund filings, that you can hide some of the bad news, not just in terms of putting it into an obscure filing but also in terms of burying it in legalese so that it’s not something that the average investor’s eyes are going to immediately run to,” he said.
Easy-to-read disclosure
Though the accounting problems at Houston-based Enron, which filed for bankruptcy protection in late 2001, and the mutual fund trading scandal that broke in 2003, have brought reforms, fund companies that want to hide news still can bury it in obscure paperwork, Mr. Kinnel said. The next wave of reforms should force companies to put vital disclosures at the top of easy-to-read documents, he said.
Mr. Kinnel said he still finds it curious that a fund can say something is tax-free in one filing and then contradict that in another.
“One hopes at least the SEC reads SEC filings,” he said.
