"Beyond SIPC" Question

[DaveLeeNC]

If I own (for example) a Dodge and Cox mutual fund in a Fidelity account, the SIPC insures losses due to fraud at Fidelity - if those shares were to disappear from my account, this would be covered by the SIPC up to SIPC limits.

Is there an equivalent protection for a similar fraud within Dodge and Cox itself? For example, if somehow half of the shares of stock held by D&C were to disappear that loss (as measured by the lower share price in the specific D&C fund) would not be covered by the SIPC.

What protections (if any) are in place (insurance and/or regulations/audits) regarding that kind of risk?

Thanks.

dave

 

[MRG]

I was involved in a lawsuit against my former employer over a massive loss in the fund their profit sharing program was invested in. Megacorp was and is liable for the loss, but the fund company stood up and filed against their insurance. Those monies were handed out to us.

I'm not sure what could make D&C shares drop like you're concerned about. The loss I had was due to mismanagement of the assets. Megacorp had instructed the fund to put 2% of the money into a high-risk investment, and when the 2% grew to over 50% of the fund, Megacorp wouldn't answer any questions about concentration risk. Then, the high-risk investment went bankrupt.

 

[audreyh1]

So you’re worried about a mutual fund going rogue? Or somehow a mutual fund company stealing assets from one of their mutual funds? - which are held separately from the corporate assets BTW.

 

[DaveLeeNC]

I was involved in a lawsuit against my former employer over a massive loss in the fund their profit sharing program was invested in. Megacorp was and is liable for the loss, but the fund company stood up and filed against their insurance. Those monies were handed out to us.

I'm not sure what could make D&C shares drop like you're concerned about. The loss I had was due to mismanagement of the assets. Megacorp had instructed the fund to put 2% of the money into a high-risk investment, and when the 2% grew to over 50% of the fund, Megacorp wouldn't answer any questions about concentration risk. Then, the high-risk investment went bankrupt.

Thanks for the response. It is the bold part that I am trying to understand. My 'concern' is not specific to D&C and is not really a concern at all. But I don't have any understanding of how funds might or might not be insured against fraud that results in a material loss of value. For example, a nefarious but highly trusted employee manages to sell a bunch of stock owned by a fund company and direct the proceeds of the sale to his/her own account and suddenly disappears.

dave

ps. I don't understand the details of your example but I am quite surprised that there is any insurance against what APPEARS TO ME to be simply unsound investing judgment.

 

[DaveLeeNC]

So you’re worried about a mutual fund going rogue? Or somehow a mutual fund company stealing assets from one of their mutual funds? - which are held separately from the corporate assets BTW.

I am not worried about it - I just want to understand what is or is not in place to protect against such an event.

dave

 

[pb4uski]

If I own (for example) a Dodge and Cox mutual fund in a Fidelity account, the SIPC insures losses due to fraud at Fidelity - if those shares were to disappear from my account, this would be covered by the SIPC up to SIPC limits.

Is there an equivalent protection for a similar fraud within Dodge and Cox itself? For example, if somehow half of the shares of stock held by D&C were to disappear that loss (as measured by the lower share price in the specific D&C fund) would not be covered by the SIPC.

What protections (if any) are in place (insurance and/or regulations/audits) regarding that kind of risk?

Thanks.

dave

Every mutual fund/ETF has audited financial statements, typically audited by one of the Big 4 audit firms, that are filed with the SEC. While a financial statement audit is not necessarily designed to detect fraud, it would likely detect the types of things that you are worrying about.

Now OTOH, if the fund loses value simply because the fund managers make bad investment decisions, there is nothing that would cover those types of losses.

 

[MRG]

Thanks for the response. It is the bold part that I am trying to understand. My 'concern' is not specific to D&C and is not really a concern at all. But I don't have any understanding of how funds might or might not be insured against fraud that results in a material loss of value. For example, a nefarious but highly trusted employee manages to sell a bunch of stock owned by a fund company and direct the proceeds of the sale to his/her own account and suddenly disappears.



dave



ps. I don't understand the details of your example but I am quite surprised that there is any insurance against what APPEARS TO ME to be simply unsound investing judgment.

There's controls around the fund's assets. It would take more than one fund employee to go rouge to sell off assets. My career was around this industry, I was frequently the technical resource to explain how the computer systems enforced the audit points required by regulators. I don't lose sleep over the concern of employees working to steal assets.

My example was a fund that allows retirement plans to substitute a subset of assets to tailor the fund to their needs. I'm not sure what transpired during the settlement process to get them convinced they shared liability. There's was a chain of communication between the fund and Megacorp with Megacorp, specifically the new senior management, dropping the ball.

 

[copyright1997reloaded]

If I own (for example) a Dodge and Cox mutual fund in a Fidelity account, the SIPC insures losses due to fraud at Fidelity - if those shares were to disappear from my account, this would be covered by the SIPC up to SIPC limits.

Is there an equivalent protection for a similar fraud within Dodge and Cox itself? For example, if somehow half of the shares of stock held by D&C were to disappear that loss (as measured by the lower share price in the specific D&C fund) would not be covered by the SIPC.

What protections (if any) are in place (insurance and/or regulations/audits) regarding that kind of risk?

Thanks.

dave

I believe mutual funds are governed by SEC regulations which require custodial relationships. Specifically, the Investment Fund act of 1940 requires a third party (a bank or trust) to safekeep the assets (i.e. act as a custodian).

Then again, I am just SGOTI and IANAL.