Fund managers who have been implicated in the recent scandals should pay their own legal expenses incurred by their respective firms, say industry officials. "If I were those directors I would not wait more than one nanosecond to pick up the phone, call the head of the management company and tell him that it’s his responsibility to reimburse the fund for those expenses," said Jack Bogle, founder and former chairman of The Vanguard Group. "It may also be a wonderful indication of how independent these directors actually are. No phone call means no independence, I would argue."

Douglas Scheidt, chief counsel for the Securities and Exchange Commission’s investment management division, said only legitimate expenses of the fund can be paid by its assets. He added that Section 17 of the Investment Company Act makes it unlawful "for a fund to indemnify a director, officer or other person if that person is found to have engaged in disabling conduct." However, funds are allowed to advance attorneys’ fees if guilt is unlikely, Scheidt said. "It’s intended to avoid the situation in which the fund is paying for persons who have been found, or likely to be found to have engaged in bad conduct."

(Institutional Investor)