[12938]
December 18, 2000
TO: BOARD OF GOVERNORS No. 68-00
PRIMARY CONTACTS - MEMBER COMPLEX No. 80-00
RE: SEC SPEECHES AT 2000 SECURITIES LAW DEVELOPMENTS CONFERENCE
Paul F. Roye, Director of the SEC’s Division of Investment Management, delivered the
keynote address at the Institute’s 2000 Securities Law Developments Conference on December
4, 2000. SEC General Counsel David M. Becker 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 issued a series of challenges to the mutual fund industry to work
with the SEC to maintain the highest standards “to preserve and bolster the trust that mutual
fund investors have placed in the industry,” and to strive for a culture in which “best practice
becomes common practice.” He also highlighted three areas that merit increased focus by fund
management, compliance personnel and fund directors: valuation, best execution, and
problematic portfolio management practices.
Roye stated that valuation is extremely important for mutual funds and is an important
area for board and management focus, “since proper valuation of fund portfolio securities is
critical to ensure that the fund share prices derived from those valuations will be fair to
purchasing, redeeming and existing shareholders.” He specifically noted that fund directors
should ensure that appropriate operational procedures and supervisory structures are in place
with respect to both “market value” and “fair value” determinations. He emphasized that even
prices provided by third parties, such as pricing services and dealers, should be subject to
appropriate controls. He reminded attendees that the staff issued an interpretative letter to the
ICI last year, which provided additional guidance supplementing the SEC Accounting Releases
on the fair value pricing process.
Roye urged attendees to “revisit their valuation policies and procedures against our
recent guidance and that provided in the ICI’s comprehensive paper on valuation.” The
Institute’s paper, Valuation and Liquidity Issues for Mutual Funds (February 1997), is
available at: http://members.ici.org/p2/whitepapers/index.html. He strongly encouraged
funds to “be vigilant” in their valuation policies and procedures, and noted that this is an area
that the staff will continue to pay particular attention to in the inspection process. Roye also
2warned that directors and managers need to be cognizant of their duties regarding best
execution, and stated that the staff is looking into the practices of “portfolio pumping” and
“window dressing.”
Roye also noted that the ICI has taken the lead in a number of areas to raise industry
standards and foster best practices. In the areas of personal trading and corporate governance,
for example, he pointed to the ICI’s guidelines as benchmarks “against which all funds should
measure themselves.” Regarding corporate governance, Roye also stated that the staff’s
recommendations to the Commission for a final rule will reflect many of the suggestions they
received in comment letters. Specifically, he noted that the staff found persuasive some of the
criticism of the proposed disclosure requirements, especially as they related to directors’ family
members. However, he also stated that the staff disagrees with those who objected to a rule
regarding independent counsel for fund directors, and that the industry should expect to see a
rule in this area.
Roye also highlighted areas in which the Commission will consider proposals to
improve the quality of fund disclosure. Roye stated that the Division is in the process of
completing its own review of fund fees and expenses, and believes that more information
regarding fees and expenses should be provided to investors. He noted that the Division
expects to recommend shortly that the Commission adopt a new rule to guard against the use of
misleading fund names, and to make a recommendation regarding the adoption of the rule
proposal to disclose to investors the effect of taxes on the performance of mutual funds. The
Division also expects to recommend that the Commission propose amendments to Rule 482 to
enhance funds’ ability to provide investors with better and timelier information in fund
advertising. The staff will also continue studying how to improve shareholder report and
financial statement presentations.
In closing, Roye noted that one of the SEC’s roles as primary regulator of this industry
“is to challenge you to conduct your business in accordance with fundamental fiduciary
principles.” In meeting the challenge of increased competition, Roye asked attendees to work
with the SEC to maintain the highest standards for the fund industry.
David Becker’s Remarks
In his address, Mr. Becker provided brief updates on two recent Commission
rulemaking initiatives, selective disclosure and auditor independence, and shared some lessons
he has learned during his first year as the Commission’s General Counsel.
Regarding Regulation FD, the Commission’s Fair Disclosure Rule, Becker noted that
despite many dire predictions about the consequences of the rule, “the sky has not yet fallen.”
He acknowledged the concerns regarding the potential chilling effect of Reg FD that were raised
by the ICI and other commenters, and noted that the Commission has tried to do its part to
respond to these concerns. For example, in its adopting release and in subsequent staff
statements, the Commission “has signaled that it does not intend to second-guess mistaken
judgments about materiality in cases that are arguably close.” Although Reg FD has only been
effective for one month, Becker complimented the investment company industry, as well as
corporate America, for its diligent efforts “to institutionalize its compliance so it can be
accomplished effectively at low cost.” He also noted that Reg FD is having the beneficial effect
3of getting people to think over disclosure issues more carefully, and that he is “optimistic that
the rule will prove to be extremely useful for our markets and for investors.”
Becker stated that the Commission recently adopted the most comprehensive overhaul
of its auditor independence requirements since the 1930s. He noted that the Commission
adopted a dual approach to conflict of interest issues. In addition to requiring disclosure
whenever possible, the rule also prohibits certain relationships between auditors and their audit
clients.
Based on his first year as General Counsel, Becker stated that he has learned that the
Commission listens to thoughtful comments received by the public, noting that the Commission
made substantial changes in both the Reg FD and auditor independence rulemakings based on
comments illustrating unidentified consequences and providing constructive suggestions. He
further stated that interaction between the industry and the Commission helps to keep the
agency’s limited resources focused “on issues of lasting significance to investors, rather than
just the issue of the moment.”
Craig S. Tyle
General Counsel
Attachment no. 1 (in .pdf format)