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MADISON, Wis. – Credit unions asking why now the increase in recent scandals involving the mutual fund industry, might want to go back to the 1980s to find the source. It was then that mutual fund companies began to grow into the $7 trillion business it is today, said Scott Knapp vice president, marketing and client services, for MEMBERS Capital Advisors, a CUNA Mutual investment affiliate. The capital structure began to change and profit generation became top priority as firms sought to appease larger institutional investors. Today, “credit unions may wonder if there is an implication of guilt by association,” Knapp said. “If a member has purchased a mutual fund, there may be some implied contact, but in general there is no direct concern for credit unions now.” At issue are a litany of allegations against Canary Capital Management LLC and questionable trading activity with Bank of America Corp.’s Nations Funds, Bank One Corp.’s One Group, Janus Capital Group Inc. and Strong Financial Corp. by New York Attorney General Elliott Spitzer and the SEC on the firms’ involvement in illegal after-hours trading and “unethical” market timing or short-term “in and out” trading. Officials at Bank of America have since said the bank would repay members of its Nations Fund if analysis finds investors suffered a loss from alleged late trading with Canary Capital, which also agreed to pay $30 million in restitution for profits generated from improper trading, plus a $10 million penalty to settle allegations lodged by Spitzer. Meanwhile, there is no mass exodus of investors away from mutual funds and as long as credit unions have a due diligence plan, any fallout from industry scandals will be minimized, Knapp said. “The problem is there is a focus on returns and what’s promised by retirement,” Knapp said. “Due diligence means making sure that the (fund) origination has a strong, corporate governing board and checking that the integrity is sound.” Knapp said because credit unions have stepped up their efforts to market mutual funds through CUSOs or another similar partnership, it is critical that an identifiable due diligence plan have its place. Still, while credit unions may be nearly immune to any recent fund scandal, the scenario may change if there is a market reversal, Knapp explained. He said that 97% of credit unions with assets over $10 million have 401(k) plans, which routinely include investment options such as mutual funds. “Stock mutual funds are doing real well now but should we have a reversal, there might be some real pain,” Knapp said. “Perfect immunization is not possible but due diligence is possible and worthwhile.” Knapp compares fund scandals to those involving the likes of Enron. In the 1990s, markets were rising and some of the recent questionable trade practices came to the forefront to appease large institutional investors. Enron sought to court and please shareholders and that desire led to serious conflicts of interests. The same holds true for mutual funds, Knapp explained, adding, the groundwork for today’s illegal trading activities was tilled nearly two decades ago. “The market timing was done for large institutional investors but the practice rises market costs and hurts everyone else and the costs will be passed on to the smaller shareholders like credit unions and 401 (k) investors,” Knapp said. If there is a light at the end of the tunnel for credit unions, the scandals could mean a competitive advantage. “Members are the shareholders and there is no conflict of interest like we’ve seen with banks or funds that encounter these conflicts,” Knapp said. “It’s the same story credit unions have been telling for years – if we do due diligence, we can have a competitive edge.” -

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