The settlement with Bank of America Corp. (BOA) and FleetBoston Financial Corp. (Fleet) is the largest yet in the widening mutual fund industry investigation, and includes corrective measures designed to set a new standard for accountability by the directors of mutual fund companies.
The agreement was negotiated jointly by Spitzer's office and the Securities and Exchange Commission and announced simultaneously today.
"This agreement marks a new phase in the effort to clean up the mutual fund industry," Spitzer said. "After focusing on the harmful effects of market timing and the problem of excessive fees, we are now taking steps to ensure that mutual fund boards of directors will be more accountable for their actions."
Under a specific provision of the agreement, eight members of the Board of Directors of Nations Funds, BOA' s mutual fund complex, will resign or otherwise leave the board in the course of the next year for their role in approving a controversial measure that enabled a hedge fund to conduct company-sanctioned market timing of BOA funds.
In May 2002, the Nations Fund board approved a 2 percent redemption fee on sales of its international funds held for less than 90 days. This measure was implemented to discourage market timing. At the same time, however, the approved measure exempted a mutual fund timer from the redemption fee. The exempted hedge fund subsequently conducted extensive timing of two of the funds in question.
"These directors clearly failed to protect the interest of investors," Spitzer said. "They acknowledged the problem of market timing, but then allowed a favored client to engage in that harmful practice. The departure of these board members should sound an alarm for all those who serve in similar capacities."
In addition to requiring the board members to retire or resign, the agreement also includes a provision that restricts BOA's ongoing involvement in the securities clearing business.
The agreement provides for payments of $250 million in restitution and $125 million in penalties by BOA. Fleet will pay $70 million in restitution and $70 million in penalties.
In a separate agreement with Spitzer's office, BOA and Fleet agreed to reduce the fees they charge investors by $160 million over a five-year period.
BOA was linked to illegal trading practices when Spitzer reached a settlement and cooperation agreement with Canary Capital Partners in September 2003. The Attorney General's office and the SEC have been investigating BOA since that time. Spitzer's office and the SEC filed civil charges against Fleet last month, accusing the company and two subsidiaries of allowing market timing in exchange for so-called "sticky assets" that generate management fees.
The two companies settled the charges against them jointly because they are planning a merger.
The BOA/Fleet settlement is the fourth since the mutual fund industry investigation began last September. Settling firms have paid $1.65 billion to date, eclipsing the value of last year's $1.4 billion settlement with investment banks. Settlement monies in the mutual fund investigation go to a special fund for restitution for consumers.
The BOA/Fleet settlement was negotiated by David D. Brown, IV and Bruce Topman of the Attorney General's Investment Protection Bureau.
