Mutual-Fund Fight

In the last decade, mutual funds have grown into a $15.8 billion business of 4,300,000 shareholders' accounts, with surprisingly few complaints from investors or the SEC. Last week the industry had its first major proxy fight--a battle for control of Managed Funds, Inc. Partly as a result of the fight, SEC issued new restrictions on operations of mutual funds.

Trouble for Managed Funds began last July when SEC suspended Managed Funds' registration, stopped the sale of its stock. At fault, said SEC, were the fund's founders and chief officers, Hilton H. Slayton and Hovey E. Slayton. Although the Slayton cousins had built Managed Funds into a fund with 22,000 stockholders and investments of $80 million, SEC found that as Managed Funds' managers, the Slay tons left much to be desired.

Fees, Fees, Fees. SEC "noted that while Managed Funds claimed that its primary objective was capital growth, the Slaytons manipulated the fund's stock not for long-term gains but "to provide a flow of cash to its stockholders at a high uniform rate" in quarterly dividends.

Through their wholly owned company, Slayton Associates, the Slaytons were supposedly the investment advisers to Managed Funds, and collected more than $1,000,000 in five years for deciding what stocks the fund should buy or sell. In fact, said SEC, the Slaytons made no market decisions. They let Stephen M. Jaquith of Manhattan's Model, Roland & Stone brokerage firm choose what stocks to trade--and also gave Jaquith Managed Funds' brokerage business. Jaquith's commissions: $1,188,155. Another Model, Roland & Stone employee, who collected $240,831: Harold W. Smith, Hovey Slayton's brother-in-law.

Who Does What. When the Slaytons stepped out under SEC fire, the control of Managed Funds was up for grabs. A New Jersey mutual-fund and investment operator, Morris M. Townsend, moved in quickly, took an option to buy the old Slayton sales firms if he won the proxy battle, hired Slayton salesmen to sell Managed Funds shareholders the Townsend case. The Channing Corp., headed by Kenneth S. Van Strum, which operates eight mutual funds worth $218 million, challenged Townsend. It pointed out to Managed Funds' stockholders that, if Townsend won, the Slaytons would reap another profit through the sale of Slayton firms to Townsend. This proved a decisive argument to disgruntled proxy voters; last week Channing won handily by 500,000 votes.

SEC issued new sets of rules for the funds which are designed to eliminate the kind of temptation that got the Slaytons into trouble. Now all investment advisers must be specifically named, together with any fees they receive from mutual funds. Brokers must also be named, along with any "reciprocal business" arrangements they make with mutuals.

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