‘Socially responsible’ fund firm failed its own rules, SEC says

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From Times staff writer Walter Hamilton:

Like other mutual fund companies in the ‘socially responsible’ investing niche, Pax World Management Corp. is supposed to follow strict ethical codes in how it picks securities.

Turns out its fund shareholders could have benefited from one more criterion: truth in advertising.

Pax World agreed today to pay $500,000 to settle a Securities and Exchange Commission probe into whether its funds misled investors by violating basic principles of socially responsible investing, such as steering clear of alcohol and gambling companies.

From 2001 to 2005, two of the firm’s funds -- its Growth fund and its High Yield fund -- bought 10 securities that violated the company’s own socially responsible guidelines, according to the SEC. Those picks were within a group of 41 securities that Portsmouth, N.H.-based Pax had purchased without screening to see if they squared with its ethics rules, the SEC said.

In one case, according to the SEC, the Growth fund invested in an oil-exploration company even though it had thrice failed Pax’s internal test of acceptable companies.

No doubt the funds’ shareholders would love to know the names of the individual stocks, but the SEC opted not to identify them in the complaint. It said only that each security violated the firm’s standards on one or more of these counts: alcohol, gambling, defense contracting, environmental issues or labor ethics.

The agency wanted to make the bigger point, which is that ‘advisers simply cannot tell investors they are going to do one thing with their funds and then not follow through on those promises,’ said Linda Chatman Thomsen, head of the SEC’s enforcement division.

Pax World’s CEO, Joseph F. Keefe, said in a statement that the $2.6-billion-asset company has done a ‘top-to-bottom reorganization’ to ‘help us assure that mistakes of this nature are not made in the future.’ Since 2005, Pax has canned senior management and its director of social research.