[DFT] FWD: [ChivalryToday] Trading in Chivalry

[Rendell Skaggs]

Trading In Chivalry
By Scott Farrell
©2003 Shining Armor Enterprises
www.ChivalryToday.com

There's a widespread perception in the financial world that money and 
the Code of Chivalry don't mix; that honor and the "knightly virtues" 
are grossly out of place on the trading floor or in the corporate 
boardroom.

This week, however, there are a few people who might take exception to 
that opinion - roughly 50 million of them, in fact. That's the number 
of individual investors who use mutual funds as a means preparing for 
retirement, and those investors recently got a reminder about the value 
of the Code of Chivalry in the financial world.

Just over a week ago the Security and Exchange Commission (the branch 
of the government that oversees mutual funds) issued a report stating 
that several investment companies were suspected of unethical dealings. 
The SEC claimed these mutual fund managers had been involved in 
practices known as "late trading" and "market timing." Late trading 
means allowing investors to buy and sell after the market has 
officially closed; market timing is permitting investors make numerous, 
rapid trades in order to take advantage of brief fluctuations in 
long-term fund values.

But the SEC is in a quandary: Legally, both late trading and market 
timing fall into gray areas. Firms are allowed to trade after-hours if 
they cannot finalize their transactions before the market closes, and 
there is no limitation on the number or duration of trades which any 
investor can make.

Yet, according to the SEC and the investment bankers alike, both of 
these practices are ethically unsound. Late trading rules can be abused 
in order to curry favor with large investors, and market timing (which 
most investment companies claim they discourage their brokers from 
doing) drives up mutual funds' administrative fees. The result is that 
both of these questionable practices, while very beneficial to savvy, 
wealthy clients, lessen dividends that are returned to the "average" 
mutual fund shareholder.

The SEC is currently drafting laws against both practices - it's yet 
another case of business giants forcing the government to legislate 
ethics and responsibility. The financial sharks who took advantage of 
these loopholes are undoubtedly proud of the returns they secured for 
their clients, and might even be indignant at the suggestion that 
something could be considered wrong without being illegal.

The problem, of course, is the lack of faith that follows the feeding 
frenzy of these sharks. For all the callous talk about cold, hard 
capitalism, this is one more reminder that a healthy economy isn't 
measured in points and percentages alone - trust, honesty and integrity 
must be factored in as well.

Faith is one of the Seven Knightly Virtues, and its role in the bank, 
the boardroom and the trading floor is a quiet but critical one. To 
measure just how crucial chivalrous practices are in today's business 
world, consider your reaction to this question: Will the SEC's new laws 
prevent further wrongdoing?

Legislation may put an end to market timing and late trading, but there 
are dozens of other loopholes and irregularities out there, waiting to 
be discovered. Only the most naïve investor would believe that the 
high-finance sharks will be deterred from exploiting those loopholes by 
either ethical standards or legal prohibitions. No law will eliminate 
dirty business practices.

What's the solution? Ironically, financial gurus are offering advice 
that bears a striking resemblance to the chivalric ideals of the 
knights of old: Before investing in a mutual fund, investigate that 
fund's management team and be sure you can put your faith in them to 
protect your interests. Brokerages that squander their clients' trust 
are likely to squander their capital as well.

Even in today's high-tech, ultra-aggressive financial environment, 
there are no substitutes for faith, trust and honesty. If you are one 
of the 50 million American households that participate in a mutual 
fund, take this opportunity to make it clear to your investment broker 
that you don't want a shark managing your money - you want a knight in 
shining armor.

= = = = = = = = =

Readers are permitted and encouraged to share this article with others 
as a way of furthering the understanding of the Code of Chivalry in the 
modern world. Scott Farrell's seminars on chivalry and the knightly 
virtues are available to businesses, schools and civic organizations 
throughout the Southern California area; more information can be found 
on our website. Please include all copyright statements and 
attributions when forwarding Chivalry Today articles. Copyright 2003 
Scott Farrell and Shining Armor Enterprises. Visit our website at 
www.ChivalryToday.com .