Merrill Lynch to Clean Mutual Funds Mess

Merrill Lynch & Co. Chief Executive Stan O’ Neal said on Wednesday he believes probes into the mutual fund scandal will spread beyond trading practices, and that final responsibility for cleaning up the mess rests with the financial industry, not regulators. Asked at a Merrill Lynch financial conference in New York to comment in general terms about the effect of the trading scandal currently engulfing the mutual fund industry, O’Neal said : “I don’t know that there’s clarity yet in terms of what the scope ultimately will be. I do believe that it will widen beyond just the trading practices.”

He said that regulatory actions stemming from the current probes could have “far-reaching consequences” for the financial industry. O’Neal comments come at a time when the $7 trillion mutual fund industry is reeling from investigations into special arrangements that enabled professionals to buy into funds at prices not available to ordinary investors. Those investigations are being led by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission. In contrast to some financial companies, Merrill has not been racked by allegations of improper trading.

The firm did, however, fire three brokers at a New Jersey office last month in connection with market timing, which is rapid-fire trading to profit from pricing lags, such as those that may occur across time zones. Another practice at the heart of regulatory probes is called late trading, or buying mutual funds at stale prices. Merrill has said its internal review uncovered no instances of late trading. O’Neal said other issues likely to gain attention from regulators are fees charged on mutual fund sales and how they are disclosed to investors, as well as the “interplay” between brokers who sell funds and companies that run them.