A couple of cases to consider here ... The basic setup is suppose an unexpected event, like a rogue trader, causes either (a) an individual mutual fund to fail, or (b) causes the family corporate organization of a group of mutual funds to fail. Two flavors: Chapter 12 and Chapter 7 bankruptcy.
Question 1: To what degree are the holders of an individual mutual fund protected against these scenarios?
Question 2: Unrelated to Question 1, presumably, and wishing to confirm, if something Untoward happens to a mutual fund the investor is investing in, that investor has the full exposure of any investor in a comparable company. Is that true? If not, how not?
Question 3: Unrelated to Questions 1 and 2, if mutual fund A of a family of funds experiences something Untoward, and investor holds but mutual fund B, that investor is insulated from whatever happens in mutual fund A. Is that true? If not, how not?
Question 4: Unrelated to Questions 1, 2, and 3, if for whatever reason the parent company or unit of a group of mutual funds fails, investors in each of the individual funds have protection from that event. Is that true? If not, how not?
Question 5: Related to Question 4, could the terms of the disposition depend upon the details of the incorporation or trust of the individual funds, the laws of the State where incorporated, and, so, are detailed in the Prospectus for the family of funds?
Question 6: Unrelated to Questions 4 and 5, but related to Questions 1, 2, and 3, could the terms of the disposition depend upon the details of the incorporation or trust of the individual funds or the holding company, if that be the organizational unit, of the family of funds?
Thanks to anyone who knows!
-- Jan Galkowski, newbie in These Here Parts.
Comments
The fund families are contracted by funds to perform those services. It just happens to be coincidence (wink, wink) that all the Fidelity Funds contract Fidelity Management and Research Company to manage the funds, they all contract Fidelity Distributors Corporation to handle distribution of the shares, etc.
So generally what happens to a fund (a separate legal entity with its own separate board of directors, its own separate assets, etc.) is separate from what happens to its fund family company. (One obvious exception is when the fund family covers a money market fund to prevent it from breaking a buck; the family does this in its own self interest to protect the cash cow from which it receives fees for services.)
Here is my understanding, FWIW:
Regarding question 1: what is the difference between your question and that of the fund manager simply running the portfolio into the ground? I believe you'd agree if the manager generates losses, the fund (and its shareholders) would be stuck with them. Perhaps the fund might sue the management company and/or the manager for exceeding authority.
Since the fund family is a separate legal entity from the fund, its bankruptcy should have no effect on the assets of the fund. A family bankruptcy would, of course, have an impact on the running of the fund. The fund's board of directors would have to select a different set of companies to provide the management and other services required by the fund. Typically, the shareholders would need to approve the new agreements. I don't think you mean Chapter 12, as that portion of the bankruptcy code applies to family farms, not family funds (though there is a superficial linguistic resemblance).
Question 2: Are you asking what happens to the value of your shares if the fund's NAV goes to zero? Your shares are worth zero. You're not personally liable for losses incurred by the fund beyond the loss of your investment.
Question 3: One is usually, but not always insulated from what happens in other funds (as contrasted with what happens with the "fund family"). My understanding is that if two funds are offered as separate series of the same registered investment company (known as series investment companies), then there is the possibility that a liability of one fund, i.e. one series, could affect the shareholders of another fund. This is obscure and perhaps not tested. See: http://www.rlf.com/files/CorpTrust01.pdf
Question 4: See response to #1 - operation of the fund would be affected, the shareholders would be required to act (vote) on changes. So, the investors are financially protected in a narrow sense, but are not protected from some nonmonetary repercussions.
Question 5: Same response. How a fund deals with switching management and other service providers is a mix of statute and prospectus.
Question 6: If a fund went bust (lost all its assets), it (the board) would have to comply with all federal and state laws, as well as any additional terms in the prospectus. This answer is basically a "motherhood" response - everything is covered by either federal, state, or contractual obligations. A mutual fund is not a holding company, so I don't know how to respond to that portion of your question.
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Conceptually, mutual funds are very simple. They are shell companies, with boards of directors and no staff. Those boards hire real companies to manage the portfolio, and to do all the bookkeeping/legal/etc. work. If one of the contracted companies fails, who cares? If the fund company itself fails, then you, the investor, lose. But it is virtually impossible for a fund company to fail in the sense of going down to zero value, since its total value is in the portfolio it owns. Portfolios don't drop in value to zero (through they can come close).
Funds which consistently fail in the marketplace (that is, those unable to attract sufficient assets to become economically viable) are routinely killed off, either by liquidation (the manager sells all of the fund's holdings and sends the proceeds to shareholders) or merger (shareholders are moved, with or without their permission, into a vaguely comparable fund which has better prospects for survival).
Advisors which consistently fail in the marketplace or run seriously afoul of securities regulators (for example, the Strong Funds or PBHG Funds) lose the contract to manage "their" funds. The boards then hire someone else to do the work.
This is all pretty routine, for what comfort that offers. It's an annoyance and a bit embarrassing, but not much worse than that.
David
http://www.bogleheads.org/wiki/Mutual_Fund_Structure
On the other hand, The Vanguard Group is a bit different in that it is an investor-owned mutual fund complex. The concept is similar to say a Credit Union and so that's why their mantra has been and can be so heavily focused on reducing fees to unheard of razor-thin levels in the industry because it's for the benefit of the investors of the mutual funds who are also in turn the owners.
More info...
http://etf.wi.gov/boards/agenda_items_2005/dc20050222_item5a.pdf
Also, by Michael S. Miller, Managing Director for Planning & Development - Vanguard: So Vanguard's mutual funds have the same SEC/SIPC protection and regulations as any other other mutual funds but it's just that the ownership structure differs. It's the only fund company whereby the mutual funds are separate legal entities which collectively own Vanguard --- whereas it's vice-versa for all other mutual fund firms.
Can Vanguard Keep the Faith While Expanding Even Further?http://news.morningstar.com/articlenet/article.aspx?id=597527
Morningstar recently issued a new Stewardship Grade for Vanguard. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is an A. What follows is Morningstar's analysis of the firm's corporate culture.