IT MAY FEEL like 2003 was a year of scandals, but that would not be true.
It has been only about three months since the first allegation of trading irregularities was made public.
That's why the "story of the year" for the fund business in 2003 will dominate the industry's news in the new year.
Each year at this time, I attempt to forecast the big developments for the fund industry in the coming 12 months. Since I started doing this in 1995, I've gotten about five calls right for every seven I've made, usually missing one call by being early and the other by being flat-out wrong.
As 2003 proved, my forecasts may not be the only big stories of the year, but I am confident that the following will be part of the fund industry landscape in 2004:
A mutual fund regulatory bill sent to the president.
Don't expect what's being proposed right now to be what actually lands on President Bush's desk. Look instead for a bipartisan bill with some of the elements of the current bill plus a few key changes.
Among the provisions you are likely to see: changes in the role of directors, trying to make fund boards more independent (it will pass as legislation, but fail in practice to improve things); increased disclosure of a fund's portfolio, its manager's compensation and its fees.
If Congress gets creative, there may also be a "point-of-sale disclosure document," where financial advisers are required to remind customers of fees and cost structures and more before executing mutual fund trades.
No progress on mutual fund tax reform.
There are proposals in Washington that, if passed, would make the capital gains a fund distributes to shareholders exempt from taxes (up to $3,000 in tax-free gains per person per year under the proposal that's furthest up the legislative pipeline). But many funds had enough losses from the bear market to offset their gains in 2003; couple that with election-year politics and this issue won't get a decent hearing until 2005.
Fund companies playing "clean and replace."
A lot of funds got stuck in the mud of the bear market. Despite good returns in 2003, a lot of long-term track records will be forever affected by the downturn.
As a result, fund firms will clean up their records by replacing losers with something new. A typical deal may involve several funds being rolled into a new offering or a strong survivor.
A payback that feels awfully stingy.
Most of the firms involved in the headline-gripping scandals have promised to make restitution to shareholders in funds where wrongdoing occurred. But when the firms start moving the cash this year, investors will find the payout small considering the hullabaloo.
Investors who participate in the class action lawsuits filed against most of the firms embroiled in legal problems may come up winners in a settlement, but they won't exactly feel like they hit the lottery either. They're likely to feel more like they won a pepperoni pizza.
At least one fund company humiliated for a lack of patriotism.
The Patriot Act is part of the homeland defense initiative, and it was extended to financial companies a year ago. There are rumors that several fund firms have failed to process all of the requisite paperwork on big-dollar transactions, something that helps the authorities spot money movement by suspected criminals.
Sometime this year, a fund firm will get nailed for not fulfilling its obligation on reporting big trades, an oversight that will have left suspected terrorists a safe harbor for storing and moving money.
Fund firms changing a lot of seemingly innocuous rules.
Don't be surprised if fund companies make a lot of tiny rules changes - the kind they expect you to not think twice about - this year. The changes may be made by proxy vote, but they are much more likely to simply be handled by the board, with shareholders being notified when they receive an updated prospectus.
The changes will seem small, but some won't be. Fund companies will be cleaning house. After they are sure they have done nothing warranting federal or state charges, they will rewrite some rules to make sure it stays that way. That means rewriting some rules to either close loopholes or make them ultra-wide to avoid rules violations. It's that second type of rule change that investors must worry about.
Regulators seizing a fund involved in a trading scandal.
Chances are good that the bad actors won't get jail time, and that the standard settlement will involve no admission of guilt by the executives or company involved.
But if regulators can find a fund that they can seize - if only to prove that they are ready to apply the death penalty where wrongdoing was allowed - they will put it into receivership. It's a rare move, but it would send the right message to executives that monkey business will no longer be tolerated.