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updated 12/5/2003 12:17:33 PM ET 2003-12-05T17:17:33

This week, Kevin from Washington wants to know what Congress has in mind for people who want to throw in the towel on credit card debt. As always, if you'd like to write to us, please include your first name and hometown.

I understand a major revision in the bankruptcy law has been passed by Congress and is now in the Senate. Where can I find a laymen’s description of the revision and how it will affect personal bankruptcies?

Kevin S. — Everett, Wash.The bill in question, H.R. 975, is monstrously complex (take a gander at this “summary”)

But the simple explanation is that this law would make it harder for individuals to wipe out their debts and start clean. So if you’re a lender, you like the bill. If you’re a borrower, you don’t.

Congress, under the forceful prodding of the financial services industry, has been trying to “reform” personal bankruptcy laws for nearly a decade. Lenders say they need relief from people who abuse the bankruptcy laws by piling up debt and then going to court to get off the hook - over and over. Proponents (including Democratic presidential candidates Sens. John Edwards, Joe Lieberman and Carol Moseley-Braun) say it’s not fair to the people who work hard to pay back their debts to let deadbeats off too easily.

Opponents say the problem is with banks and credit card companies who sell too many credit cards to people who can’t pay and shouldn’t have them.

Either way, the number of bankruptcy fillings continues to grow. In the latest fiscal year, ended Sept. 30, those filings hit a record of nearly 1.7 million - double the 1994 level. The question is: Does that increase reflect the dire financial squeeze of a rotten job market and a weak economy? Or are the laws letting deadbeats off the hook too easily?

So it’s not easy to find impartial descriptions of just what the impact of the law would be. Consumer groups, like the National Consumer Law Center, have a lot of gripes with the latest bill. The National Association of Federal Credit Unions is among those trying to strike a balance.

Despite passage by the House, including support from some 89 co-sponsors and strong support from the White House, the bill was among a number of provisions that never made it to the Senate for a floor vote.

But you can bet that the issue will be back again when Congress returns from recess in January. Until then, look for personal bankruptcy fillings to continue rising.

EARLIER ANSWERS

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SEIZE THEIR ASSETS

If these mutual fund companies made their money illegally, why aren’t the assets frozen? If you’re a drug dealer, you made your money illegally and the government takes everything because you made the money illegally, right? So, tell me the difference between the two? And when these companies are found guilty and fined, what about the people who invested in these companies? Do they get their money back? Where does that money go?

Cyndy H., — Milwaukee, Wisconsin

I nominate you to be chairman of the Securities and Exchange Commission. Your way of thinking would go a long way to preventing mutual fund managers from ever stealing from their customers again.

Unfortunately, the SEC is run by lawyers, and they have a way of making things a little more complicated.

First of all, the there’s a big difference between the laws currently on the books that cover securities fraud and those governing the sale of drugs on a street corner. Most securities cases handled by the SEC involve civil, not criminal, charges. When the SEC wants to press criminal charges, they refer the case to the U.S. Attorney’s office in New York.

The SEC almost always, however, slaps fines on people who break those civil laws. When a company settles and agrees to pay it (or fights it and loses in court), that money goes directly to Uncle Sam, specifically the U.S. Treasury Dept. The idea is to make it costly for someone to commit fraud.

The SEC can also ask for “disgorgement” of money that was stolen (known in SEC-speak as “ill-gotten gains”) and then try to give it back to the people who were defrauded. Unfortunately, returning the money to people who were bilked is a little more complicated than giving a stolen wallet back to its rightful owner. How do you prove who lost money? And how much should they get back? With stocks and mutual funds, a lot depends on when you bought and sold and how long you held the shares. The cost of accounting for all those transactions can quickly eat up a lot of the money that’s supposed to go to the fraud’s victims.

When the SEC sets up a “restitution” fund to pay back investors who were scammed, each fund is managed separately. Unfortunately, there’s no Restitution Hotline you can call.

You can, however, go to the SEC’s Web site, where you’ll find a list of current claims being paid to investors. If you don’t see your investment there, call the SEC Investor Assistance line at 202-942-7040 or email them at help@sec.gov. If that doesn’t work, contact the regional SEC office in your area.

MORGAN STANLEY REFUNDS?

Please advise who I should contact regarding funds I have with Morgan Stanley in Red Bank, N.J. I do not have a lot invested, but the fees I have been charged are not to my understanding.

Anne P. — Parsippany N.J.

In the case of Morgan Stanley, which paid its brokers bonuses to steer investors to high-priced funds without telling those customers, you may be in luck. The $50 million fine the company agreed to pay to settle charges will go into a so-called Fair Fund — all of which will be paid customers who bought “preferred” fund shares from January 1, 2000 through the present.

These shares were not Morgan Stanley funds; they were part of a “partners” program involving 16 other mutual fund companies. Unfortunately, the SEC won’t name those funds because the companies are still under investigation. So how, then, can you know if you qualify for a refund?

For now, you don’t. The SEC has ordered Morgan Stanley to set up a distribution plan, which will then pay investors who qualify. The odds of collecting are pretty good: some 7 million transactions involving about 2.7 million customers are covered by the plan.

(A smaller group of investors, about 7,000, will be eligible to convert higher-priced B shares for A shares. But you only qualify if you bought $100,000 worth of those shares.)

Merri-Jo Gillette, who oversees enforcement actions in the SEC’s Philadelphia office, says the best you can do for now is to contact Morgan Stanley, make sure they have your current address, and then sit tight until the distribution plan is worked out. Since they’ll be handling the distribution, you’ll want to make sure they know where to find you.

FUND MANAGER PAYCHECKS

Is there any way to determine the compensation, direct and indirect, of mutual fund officers and managers of particular funds? That information does not appear in their prospectuses or on their Web pages or any of the annual reports they provide. Does the new House legislation require such disclosures?

Bill — Albany, GA

No, it doesn’t. As you point out, mutual fund investors are completely in the dark when they try to find out how well their fund’s manager is getting paid.

“To me, the really appalling part is that we can’t find out what the manager’s bonus is based on and how much they have in their funds,” said Russel Kinnel, a mutual fund analyst at Morningstar. “We’ll know Congress and the SEC are serious about reforming funds when they start to require this information.”

Apparently, Congress isn’t there yet. The Mutual Funds Integrity and Fee Transparency Act (H.R. 2420), passed by the House this week, makes a half-hearted attempt to address this issue - by requiring funds to disclose how they decided how much to pay their fund managers. But they don’t have to come clean with the size of those paychecks. The Senate is just getting started on its version of the bill, S.1822, which has similar language which talks only about disclosing the “structure” of fund mangers’ compensation.

And even if Congress hears from all of you Answer Desk readers demanding tougher disclosure requirements, any such law has to get past the mutual fund lobby, one of the nation’s most powerful.

“They will be out in full force,” said Sally Greenburg at Consumers Union, “although they’re running for cover now.”

For more on HR 2420, check out the House Financial Services Committee Web site.

ARE MY FUNDS OK?

I’d like to know if any of the mutual funds in my 401(k) plan are under investigation. The record keeper for our plan is Prudential.

Here is a list of the funds: [fund names deleted].

Robin D. — Manchester, NH.

At the moment, it’s impossible to say. The SEC and New York Attorney General’s office have sent warning letters to hundreds of funds saying they may be a target, but until formal charges are filed — let alone proven to be true — you have no way of knowing whether your fund will be dragged into the mess. The risk now is that, if you shift money to a new fund, that fund could end up in the headlines tomorrow.

The SEC says it believes about 1 in every 4 funds may be involved in one of the abusive trading schemes that are the focus of the broad investigation. But since federal regulators were so far behind the curve, Washington has a lot of catching up to do. It may be awhile before it can sift through all the evidence to determine which funds are guilty and which ones aren’t.

If you’re invested in one of the funds that has already admitted they let professional traders profit at the expense of small, long-term investors, you may want to sell your shares just to be rid of the bums. If you’re considering moving your money, but still believe mutual funds are the way to go, the safest thing is to stick to basics. Look for mutual funds with the lowest fees and consistent management (recent changes are a red flag). And avoid funds that have a high “turnover” rate — they drive up fees by moving in and out of stocks.

What is the risk of holding on? If other shareholders bail out of your tarnished fund in large numbers, the fund manager may have to sell stocks faster than they’d like. That means you may get hit with a bigger capital gain that you wanted or expected. And tarnished funds that lose assets quickly will have to spread costs over fewer shareholders, so the your fees may go up. Funds with a bad name will also probably have trouble getting — and keeping — their top performers.

But keep in mind that you’re much less likely to lose a bundle holding a fund that’s the target of the current investigation than you would have lost by holding, say, Enron or Lucent stock. That’s because, for most of these funds, there’s still nothing wrong with the stocks they hold. Even if the fund has to liquidate, it should still be able to raise plenty of cash to pay shareholders.

FINDING FUND FEES

Why, whenever I have a transaction for either a mutual fund or stock, do I buy it for the high price of the day and sell it for the low price of the day. Is the SEC monitoring these specifics or is this something that the government should also look at? Is this another can of worms for the worms?

Duane R — Chicago

The difference in the two prices you’re referring to is the “spread,” and it represents the commission that is paid to the broker who executes your trade. In theory, buyers and sellers could be matched electronically. But as long as the trades are handled by human beings, they have to get paid somehow.

While fees are regulated, they vary a great deal, and high fees can quickly sap your fund of any investment gains. The NASD limits sales loads to 8.5 percent, for example, which is more than many funds are making these days.

The “spread” is one of the most visible fees: You just compare the “bid” (the price you’ll pay to buy a share) and the “ask” (the price the seller gets) and the difference represents a commission you pay. You may pay a “sales load” — the broker’s commission — on the front-end (when you buy) or back-end (when you sell) or both.

But the “spread” is only one of the costs you’ll encounter when you invest in mutual funds. The problem many individual investors have is figuring out just how much they’re paying — and where all these fees are going. That’s one of the ways that New York Attorney General Eliot Spitzer wants the industry to clean up its act — by making it much easier to figure out what you’re paying.

Until that happens, you’ll just have to dig further to find the other fees and expenses buried in the fund’s prospectus — that mind-numbing document written by lawyers that fund companies know you’re just going to throw away.

Each time the fund manager buys or sells a stock in your fund, for example, there’s a commission paid to whoever executed that trade. Funds with high “turnover” — heavy trading of its portfolio — will pay more in commissions that more stable funds. You may also be charged so-called 12b-1 fees for expenses like advertising and marketing — for all that useless junk mail your fund sends you every month trying to get you to buy other funds from the same company.

The list goes on; for details on other fund fees you may be paying, check out the Securities & Exchange Commission’s explanation.

One of the easiest ways to compare funds is to look at the so-called “expense ratio.” Though not all fees are covered, this is supposed to tell you what percentage of the funds assets are being used to pay fees and commissions to the fund manager and the various traders and brokers who get their cut. The higher the expense ratio, the more likely your fund is to lag other funds in its category, because there’s no connection between the level of fees you pay and the funds performance. In this case, you don’t necessarily “get what you pay for.”

AM I TRAPPED?

What do you think of letting victims of the current mutual fund scandal pull their money out (even if it’s an IRA) with no penalties? Otherwise, they are somewhat trapped in a no-win situation.

Donna — San Antonio, Tex.

You can move money from one mutual fund to another without penalty as long as you keep the money within an IRA. Some brokerage IRA accounts let you to buy and sell from a variety of fund families within that account. If your IRA account is “captive” to a single fund family, you can “roll over” the money into a new fund IRA within 60 days and not owe any taxes or penalties.

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