A Letter from the President and CEO of Pax World Funds
RE Pax World Management Resolves Legacy SEC Claims
Dear Fellow Shareholders,
I want you to know that Pax World Management Corp. (“Pax World”), investment adviser to Pax World Funds, today entered into a Settlement Order with the Securities and Exchange Commission (“SEC”), concluding an investigation that was commenced by the SEC in December 2004, prior to my arrival as Pax World’s CEO. Since arriving on the job in May 2005, I have worked diligently to address all issues of concern and to cooperate with the SEC in its investigation. We are pleased that the investigation is now behind us and that the SEC has recognized Pax World’s substantial remediation efforts and cooperation in its Order, which you can access at http://www.sec.gov/news/press/2008/2008-157.htm.
The settlement involves the 2001 – 2005 time period. As recounted in the Settlement Order (which Pax World can neither admit nor deny), during that period the former portfolio managers of the Growth Fund and High Yield Fund bought a relatively small number of securities that had not been screened by our Social Research Department prior to purchase or that had failed a social screen. Under the terms of the settlement, Pax has agreed to a cease and desist order and a civil penalty of $500,000. We have specifically settled claims under Section 206(2) of the Investment Advisers Act, which I would note is a section involving negligent conduct, not intentional wrongdoing.
We take these issues very seriously. Social screening is central to what we do and who we are. Since 2005, we have invested considerable resources and have entirely overhauled our compliance procedures to ensure that our current portfolio managers buy only securities that have passed our social and environmental criteria. We also have new people in place to manage our Social Research Department and the two funds involved.
The Pax World Balanced Fund, which held approximately 92-97% of Pax World assets during this time period, did not purchase any unscreened securities and was not cited in the Order.
I want you to know, as well, that the social screening issues described in the SEC’s Order did not cause any financial harm to shareholders.
Specifically, the Settlement Order asserts that during the 2001 – 2005 time period:
- The former portfolio managers of the Growth and High Yield Funds purchased 41 securities that were either not socially screened prior to purchase or had failed a screen. Of these, 10 securities (out of approximately 650 purchased by Pax World Funds during that time period) actually failed the social screens and therefore should never have been purchased in the first place. The Order also asserts that, although Pax World made efforts to re-screen portfolio securities on a periodic basis, it did not continuously re-screen these securities as described in fund prospectuses.
- In addition, our social research department made an error in applying our weapons screen to one company.
- The management company failed to report its mistakes properly to the board of the Growth Fund and High Yield Fund.
Pax World’s response to these issues has been vigorous. The portfolio managers of the two funds involved – the Growth Fund and the High Yield Bond Fund – as well as the head of the Social Research Department, and Pax World’s outside counsel and chief compliance officer are no longer employed by the firm.
As part of a top-to-bottom reorganization and modernization of our business operations that we have implemented since my arrival in 2005, we have put in place new social screening and other compliance procedures, controls and technology. We are confident that the steps we have taken to upgrade Pax World management, personnel and compliance controls will help us assure that mistakes of this nature are not made in the future. In fact, the Chair of the Board of Pax World Funds, in a letter to shareholders available below has stated that these improvements “have resulted in significant benefits to the Funds’ shareholders.”
We are also a company that is moving forward, and that is focused on the future. Over the past year, Pax has acquired or launched five new mutual funds – including the Pax World Value Fund, Small Cap Fund, International Fund, Global Green Fund and Women’s Equity Fund – and has hired new portfolio managers, analysts and a UK-based sub-advisor to help manage these new funds. We have overhauled our web site, have begun providing consolidated quarterly account statements to shareholders, and have improved web-based Account Access, E-Delivery and other shareholder communications. We are now a better, stronger company – one that is busy launching new funds, hiring new personnel, providing better service to our shareholders, and leading the next generation of sustainable investing.
I can assure you that we also endeavor to meet best practices in all aspects of our business and operations. I believe our shareholders have benefited and will continue to benefit from the improvements we have implemented. Like all companies (and all individuals) we are not perfect, but we are constantly striving for improvement. We regret and take full responsibility for what occurred during the 2001 – 2005 time period. We are also proud of the progress we have made and we are committed to meeting the highest standards going forward.
On a personal note, I would only add that I was impressed by the professionalism exhibited by the SEC and the New Hampshire Bureau of Securities Regulation in the conduct of this investigation, was pleased to cooperate with their enforcement staff, and am happy to report that the matter has been resolved.
Please don’t hesitate to contact me should you have any questions or concerns.
Sincerely,
Joseph F. Keefe
President and CEO
A Letter from the Chair of the Board of Trustees, Pax World Funds
RE Pax World Management Resolves Legacy SEC Claims
I am an independent trustee and the chairman of the Board of Trustees of the Pax World Funds (the “Funds”). On behalf of the independent trustees, I am writing to inform you that the Board and the independent trustees have carefully reviewed the response of Pax World Management Corporation (“Pax World”), investment adviser to the Funds, to the investigation by the Securities and Exchange Commission (“SEC”) that led to the SEC’s recent Consent Order concerning Pax World. The Consent Order primarily addresses social screening by the former portfolio managers of the Pax World High Yield Fund and Pax World Growth Fund.
The Board and the independent trustees are satisfied that Pax World provided full disclosure to the SEC and to the Board concerning these issues, and we have concluded based on this information that there was no economic harm to Pax World shareholders in connection with matters referenced in the Consent Order. The Board and independent trustees are also satisfied that Pax World’s current social, environmental and governance screening processes have been reasonably designed to assure appropriate review of all securities by the Funds, both prior to their purchase and on an ongoing basis. We have also overseen and reviewed the steps taken by Pax World since 2005 to strengthen its management team and to improve its and the Funds’ compliance program and internal controls, all of which have resulted in significant benefits to the Funds’ shareholders.
We are pleased that Pax World and the SEC were able to resolve these issues and reach this settlement agreement.