[13536]
May 23, 2001
TO: BOARD OF GOVERNORS No. 24-01
PRIMARY CONTACTS - MEMBER COMPLEX No. 35-01
SEC RULES MEMBERS No. 45-01
RE: ICI 2001 GENERAL MEMBERSHIP MEETING SPEECHES
Paul Roye, Director of the Securities and Exchange Commission’s Division of
Investment Management, Terry K. Glenn, Chairman of the Institute’s Board of Governors, and
Institute President Matthew P. Fink spoke at the Institute’s 2001 General Membership Meeting.
Copies of their speeches are attached, and they are summarized below.
Paul Roye’s Address
Paul Roye’s address focused on the following areas: (1) challenges in a difficult market;
(2) the importance of valuation; (3) improving shareholder communications; (4) advertising; (5)
new products and technologies; (6) affiliated transactions; and (7) after-tax returns. With
respect to challenges in a difficult market, Mr. Roye cautioned funds to “be judicious when
considering job cuts,” noting that “cutting corners in the legal and compliance area could spell
disaster for some in the fund industry.” He also noted that in “a down market investors are
more likely to pay attention to fee levels,” and thus stressed that it is incumbent on fund
managers and directors to evaluate the appropriateness of any fee increases and to ensure that
they are justified.
Mr. Roye emphasized that valuation is an area that is fundamentally important to the
industry continuing its tradition of integrity, and stated that a recent letter from the staff to the
ICI highlights a fund’s obligation to monitor events that might necessitate the need to use fair
value pricing to protect fund shareholders. On the topic of shareholder communications, Mr.
Roye mentioned that that staff is looking at disclosure of fund portfolio holdings, with the goal
of improving the quality of portfolio schedule information. He noted that the staff, in response
to several rulemaking petitions, is considering the issue of the frequency with which portfolio
holdings are disclosed, and that the staff will need to balance the desires of various types of
investors against imposing undue burdens or causing adverse impacts on funds. One of several
improvements the staff are considering is exploring the issue of making mutual fund fees more
transparent to investors.
2In the area of advertising, Mr. Roye stated that the staff is “actively considering revisions
to our advertising rules and exploring how to promote the use of more current performance
information.” He also noted that the staff has been pleased to see that recent fund
advertisements have been alerting readers to market volatility and referring readers to web sites
and other sources for more current performance numbers.
With respect to new products and technologies, Mr. Roye noted that the staff are
reviewing various web-based products, such as baskets of securities, to ensure that they are
operating in the appropriate regulatory box. Additionally, the Commission plans to publish a
concept release regarding actively managed exchange-traded funds to gain a better
understanding of the issues surrounding these products. Mr. Roye also mentioned that the staff
has been asked to consider expanding the scope of existing rules and the adoption of new rules
to provide additional relief in the area of affiliated transactions. He stated that any
amendments in this area “must first recognize that Section 17 is the heart of the ’40 Act and any
changes must be tested against the possibility of abuse and cannot compromise investor
protection.”
On the topic of after-tax returns, Mr. Roye identified two bills that would allow
shareholders to defer paying taxes on fund distributions that have been introduced in the
House of Representatives. Mr. Roye stated that if such legislation is adopted and it turns out
that most fund shareholders are able to defer paying taxes on distributions until they redeem
their shares, the staff “will seriously consider whether there is a need for funds to provide after-
tax returns.” In conclusion, Mr. Roye encouraged the industry to continue the joint tradition
with the SEC of “holding each other to the highest possible standards” so that we can all work
towards our larger objective of maintaining the public confidence in the integrity of the mutual
fund industry.
Chairman’s Report
Mr. Glenn’s report focused on the state of the mutual fund industry and some basic facts
about the industry and its shareholders. He stated that 2000 was a significant year for the
mutual fund industry and noted that despite the downturn in the equity markets, the industry
ended the year with record net new cash flow into equity funds. Mr. Glenn also stated his belief
that “mutual funds will continue to be preferred by many different kinds of investors for many
different reasons,” largely because the industry has always ensured that investors are placed
first and that they are always protected.
With respect to confronting some misconceptions about funds, Mr. Glenn highlighted
the following facts about funds and fund shareholders: (1) mutual fund shareholders do not
drive the stock market: (2) most fund sales are made through a third party; (3) most fund
shareholders trade infrequently; (4) mutual fund investors do not panic; (5) vibrant competition
has produced substantially lower mutual fund costs; and (6) market share within the fund
industry is not concentrated and has changed little in recent years. Mr. Glenn concluded his
remarks by noting that the industry “is a noble profession, built on both a moral and legal
obligation to act as a fiduciary in serving our shareholders,” which has spawned a culture that
“has earned the trust of more investors than any other financial enterprise in the history of the
world.”
3President’s Report
Mr. Fink’s report emphasized three areas in which the industry must, in the words of
Oliver Wendell Holmes, Sr., “move in the right direction” for investors: (1) the laws that protect
fund shareholders; (2) the standards the industry sets for itself; and (3) the responsibilities that
come with the industry’s prominence.
Mr. Fink stated that “we must never assume that yesterday’s laws and regulations are
good enough for today’s shareholders.” He expressed his hope that in revising shareholder
reports, the SEC would continue on its groundbreaking path of disclosure reform to “refocus
these reports on matters most essential to informed investment decisions” and resist calls for
fuller and more frequent disclosure of a fund’s portfolio holdings, which would “make money
for traders that will come straight out of the pockets of fund investors.” Mr. Fink also stated
that SEC rulemaking in the area of synthetic fund-like products is critical because “products
that mimic mutual funds but avoid critical investor protections are creating serious and
unnecessary risks” to the industry’s foundation of shareholder trust and confidence.
Mr. Fink also noted that the industry’s voluntary practice of investor education has
aided the positive and far-sighted response of mutual fund investors to the recent bear market
in stocks. Additionally, fund companies continue to provide a wide array of educational
services to reinforce sound investment principles, and the Institute has intensified its investor
outreach efforts. In this regard, Mr. Fink highlighted the ICI Education Foundation’s “Investing
for Success” program, aimed at helping middle-income African Americans become more aware
of opportunities to invest for education and retirement.
Mr. Fink stated that “our industry’s prominence obliges us to address important issues
beyond traditional mutual fund regulation and operations.” He highlighted four specific ways
in which the industry is involved in national policy debates that affect shareholder interests: (1)
supporting legislation that would allow those who provide 401(k) plan’s investment options to
offer advice to employees; (2) supporting the bipartisan pension reforms sponsored by
Representatives Portman and Cardin and Senators Grassley and Baucus; (3) supporting
measures to increase education savings, such as proposals to enhance state-sponsored 529 plans
and education IRAs; and (4) working for commonsense improvements in our tax system that
will help shareholders meet long-term savings and investment goals. In conclusion, Mr. Fink
stressed that “to move in the right direction for investors,” we must be “guided by a single
beacon – an unshakeable commitment to serving the best interests of mutual fund
shareholders.”
Doretha VanSlyke Zornada
Assistant Counsel
Attachments
Note: Not all recipients receive the attachments. To obtain copies of the attachments to which this memo refers,
please call the ICI Library at (202) 326-8304 and request the attachments for memo 13536. ICI Members may retrieve
this memo and its attachments from ICINet (http://members.ici.org).
Attachment no. 1 (in .pdf format)