1[11470]
December 15, 1999
TO: BOARD OF GOVERNORS No. 74-99
INVESTMENT COMPANY DIRECTORS No. 13-99
SEC RULES MEMBERS No. 79-99
SMALL FUNDS MEMBERS No. 19-99
RE: SEC SPEECHES AT 1999 SECURITIES LAW DEVELOPMENTS CONFERENCE
______________________________________________________________________________
Paul F. Roye, Director of the SEC’s Division of Investment Management delivered the keynote
address at the Institute’s 1999 Securities Law Developments Conference on December 9, 1999. SEC
Commissioner Paul R. Carey spoke at the conference luncheon. Copies of their speeches are attached,
and they are summarized below.
Paul Roye’s Remarks
In his speech, Mr. Roye focused on the challenges and opportunities for the future of the mutual
fund industry. He noted that learning from the past is one of the keys to doing well in the future. He
therefore suggested that, as the fund industry seeks to innovate, “it would be wise both for the industry
and its regulators to remember and respect the framework and attributes that have enabled the mutual
fund industry to become one of the major success stories of the twentieth century.”
Roye noted that since its early beginnings, the industry has been able to keep conflicts of interest
in check, and that the watchdog role of independent directors is fundamental to the framework
established by the 1940 Act to address such conflicts of interest. He stated that strengthening that role
of independent directors will be one of the Commission’s key goals as regulators in the next century.
Towards this goal, Roye noted that the SEC recently proposed a comprehensive package of fund
governance reforms, and just issued a letter to the ICI expressing the Division’s views on fair value
pricing, which is one of the key tasks performed by fund directors.
Roye also stated that the unique role played by a fund’s independent directors has enabled the
Commission to provide flexibility to the industry as it confronts the restrictions imposed by the 1940
Act, notably in issuing exemptive rules and orders permitting transactions between a fund and its
affiliates. As the financial services industry undergoes consolidation on a global scale, Roye noted that
the SEC increasingly will be called upon to provide the flexibility to accommodate change and will, in
turn, have to rely on the funds’ independent directors to help ensure investor protection.
In the area of disclosure, Roye noted that the SEC plans to amend Rule 482 to eliminate the
requirement that the substance of the information contained in an advertisement be derived from the
statutory prospectus, and to recommend revisions to the shareholder report and financial statement
requirements in order to improve these communications to shareholders. Roye further commented that
2the SEC will explore the concept of an “annual prospectus update,” which would be a concise document
provided to fund shareholders annually to inform them of material development and changes in a fund’s
operations.
On the topic of technology, Roye stated that the SEC would work to facilitate innovation and
assure investor protection as we enter the “e-century.” He noted that a joint interpretive release with the
Division of Corporation Finance that clarifies and expands the 1995 and 1996 releases concerning the
electronic delivery of information should be out shortly. He also assured attendees that the SEC is ready
for Y2K and will “operate a command and control center to gather critical status information from fund
groups and others during the last week of this month and the first week of January.”
In closing, Roye urged all members of the industry to “stay ever vigilant” and be aware that just
because a particular idea or innovation does not violate the federal securities laws or rules, it is not
necessarily ethical or even smart. He stated that members of the industry working in compliance and
legal capacities are responsible, in part, to protect their organizations, and should be “at the forefront of
assuring the integrity of the mutual fund industry so that the success of the past century can be
multiplied in the next.”
Commissioner Carey’s Remarks
Commissioner Carey’s remarks focused on fund governance from the perspective of how fund
investment advisers vote the securities held in their funds’ portfolios. He noted that a fund adviser has a
fiduciary duty to act in the best interest of the fund when voting portfolio securities and questioned how
effectively fund advisers are carrying out their responsibilities as fiduciaries in this regard.
Carey stated that prior to voting and consistent with their fiduciary duties, some fund advisers
may discuss with management their views on key issues that affect shareholder value, such as: (1) setting
executive compensation levels; (2) repricing stock options; and (3) managing earnings through
inappropriate accounting practices. He also stated that this type of an active role by fund advisers
seems to be the exception, rather than the rule. Carey further noted that often fund advisers approach
corporate governance issues by voting proxies according to the recommendations of proxy consultants,
or by selling the stock in the portfolio if they are dissatisfied with company management.
Carey also stated that fund boards can and should play a role in the voting process by
communicating with their advisers to determine how the adviser is voting and making voting decisions.
Additionally, he maintained that fund boards should consider providing
guidance to advisers about how fund shares should be voted. He stated that most
importantly, fund boards need to consider how they want voting power to be exercised in conflict of
interest situations. Finally, he encouraged funds to think about what can be done to enhance funds’
voting power in order to maximize shareholder value, and to fairly recognize and address conflict of
interest situations.
Doretha VanSlyke Zornada
Assistant Counsel
Attachment
3Note: Not all recipients receive the attachment. To obtain a copy of the attachment referred to in this Memo, please call the
ICI Library at (202) 326-8304, and ask for attachment number 11470. ICI Members may retrieve this Memo and its
attachment from ICINet (http://members.ici.org).