Mutual fund finally cleans up its act

The move comes after the Investment Company Institute's recent "best practice" recommendations of corporate governance standards for funds. The change wasn't required (and shame on the Securities and Exchange Commission that it wasn't), but it was smart.

With the fund up more than 100 percent year-to-date, Leonard Jacob's director status can be changed and the firm will probably earn public praise for stepping up to "best practices."

Without that performance push, the media would have been much more likely to focus on the fact that the uncle had been sitting on the board while the fund lost more than 80 percent of its value since it opened in 1999. That's performance only an uncle could love.

The move did prompt another interested director of the fund to resign, so that the majority of the board would remain independent, as required by the rules governing funds.

Of course, if Leonard Jacob was an interested director cloaked as an independent all along -- as every reasonable observer has always assumed -- it means investors weren't getting much independent guidance. That's precisely why the SEC ought to turn the industry's recommended best practice into law and make it a compliance issue for all fund companies.

It's important to stress that the fund was considered in compliance, even with the manager's uncle as an independent director. But you have to wonder if anyone cares that the firm was in bounds on the rules when the conduct looks so laughable.

Several securities lawyers I have talked to suggest that playing within the rules in this case won't necessarily stop them from pursuing the fund company, saying that a truly independent director might have urged the fund to go in a different managerial direction when it was bleeding so badly for so long. . . .

At the Society of American Business Editors and Writers Conference on Personal Finance in Denver, Vanguard founder Jack Bogle was beating the drum for changing the way funds are governed.

Asked if he fears that investors are losing confidence and will question why they should buy funds, Bogle said that's his biggest worry.

Asked what he'd suggest those investors do, Bogle quipped, "Well, I'd hope they would take their money out of the bad funds and put it into funds I like."

While he didn't reiterate it in his talk, Bogle's favorite stock fund has long been the Vanguard Total Stock Market Index (VTSMX).

Bogle's best suggestion for fixing the fund industry in light of the trading scandals is one that is simple enough: End daily transactions in mutual funds at 2:30 p.m. EST, 90 minutes before the markets close.

That kind of switch -- where any transaction put into play after 2:30 gets the next day's price - would go a long way to eliminate the late-in-the-day market-timing trades at the center of the current scandal.

There are a very few fund companies already doing it on their own, typically with index funds.

It makes so much sense that you just know the fund industry will howl when they hear it. That alone makes it worthwhile for regulators to study and for investors to embrace.

Chuck Jaffe is senior columnist for CBS MarketWatch. He can be reached at jaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.