Agency Conflicts

Abstract

In September 2003 the mutual fund industry was hit by its first big scandal in history (e.g. Zitzewitz, 2006). Several investment management companies were accused of improprieties regarding pricing calculations and trading deadlines. Favorable clients were allowed to trade on a high frequency in mutual fund shares generating profits at the expense of long-term fund investors. In return, these clients `parked" large amounts of assets into other funds from the same investment management company generating fee income. These actions were a violation of the fiduciary standards of the mutual funds and were in some cases illegal. This scandal has spawned a discussion about conflicts of interest in delegated management. The efficiency of governance mechanisms, manager compensation as well as the appropriateness of the fee level in general have been addressed.