[14771]
May 29, 2002
TO: BOARD OF GOVERNORS No. 20-02
PRIMARY CONTACTS - MEMBER COMPLEX No. 42-02
SEC RULES MEMBERS No. 42-02
RE: ICI 2002 GENERAL MEMBERSHIP MEETING SPEECHES
SEC Chairman Harvey L. Pitt, Terry K. Glenn, Chairman of the Institute’s Board of
Governors, and Institute President Matthew P. Fink spoke at the Institute’s 2002 General
Membership Meeting.* Their speeches are summarized below.
SEC Chairman Pitt’s Address
Chairman Pitt opened his remarks by expressing concern for the erosion of investor
confidence as a result of negative forces affecting our nation’s capital markets. According to
Mr. Pitt, participants in the securities industry grew complacent during the long bull market
and forgot their responsibilities to shareholders. He stated that now that the euphoria of the
80’s and 90’s has worn off and been replaced with investor distrust and shaken confidence, “we
must not delay in addressing the critical need to effect a massive restructuring of the regulatory
regime that governs our capital markets, nor can we be cavalier about fulfilling our obligation
to restore investor confidence and trust.”
Mr. Pitt commented on the SEC’s role and the solutions the agency envisions as it seeks
to effectuate fundamental, long-needed, changes in our capital markets and system of securities
regulation. He noted that substantial improvement was needed in three key areas – corporate
disclosure must be truly informative, timely and honest; oversight of accountants and the
accounting profession must be strengthened and accounting principles that underlie financial
disclosures must be made more relevant and comprehensible; and corporate governance must
be upgraded. The Commission has already announced or taken a number of initiatives in these
areas.
Mr. Pitt pointed out that the industry plays a key role in the efforts to restore investor
confidence and improve the functioning of our capital markets. He identified several current
issues that are before the Commission that are of direct consequence to the industry. He cited
∗ Chairman Pitt’s speech may be found at (http://www.sec.gov). Terry Glenn’s and Matt Fink’s speeches may be
found at (http://www.ici.org/ici_info/glenn_02_report_speeches.html) and
(http://www.ici.org/ici_info/fink_02_report_speeches.html), respectively.
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the Commission’s exercise of its exemptive authority in connection with recent rule proposals
relating to affiliated transactions involving fund sub-advisers and portfolio affiliates. Other
initiatives he referenced include proposed amendments to fund advertising rules and a review
of issues relating to exchange-traded funds.
Chairman Pitt indicated that there are three specific areas of concern to the Commission
relating to the fund industry: private investment funds, fund distribution practices, and proxy
voting by investment advisers. With respect to private investment funds, he noted that the
Commission will review the current state of regulation to ensure that the regulation—or lack
thereof—is in the public interest. With respect to fund distribution practices, he noted that
some funds and advisers have changed their practices since 1980 when Rule 12b-1 was adopted.
As a result, the Commission must reexamine certain aspects of the rule. The Commission also
intends to examine indirect methods of financing distribution to ensure that these arrangements
are properly considered by fund directors. Finally, with respect to proxy voting, he noted the
Commission is considering several rulemaking petitions that request that mutual funds be
required to disclose their proxy voting policies and the way votes are cast.
In conjunction with this overview of regulation, the Commission is conducting an
internal review of its own operations, resources, efficiency and productivity. In closing, Mr. Pitt
invited the industry to join with the Commission in advancing the interests of America’s
investors. He said, “Together we can improve the mutual fund regulatory framework, and
reshape the essence of corporate disclosure, corporate governance and accounting regulation
with thoughtfulness, care and creativity.”
Chairman’s Report
Terry Glenn’s address focused on the mutual fund industry’s tradition of integrity and
how, despite the adversity of the past year, the enduring benefits and investor protections of
mutual funds continue to attract shareholders.
Mr. Glenn commented on the growth of the mutual fund industry, noting that one out of
every three individuals and more than one-half of all Americans now own mutual funds.
Increased competition in the industry has not only served to offer Americans more investment
choices, he said, it has produced substantially lower mutual fund costs and has helped make
saving and investing in mutual funds simpler and more accessible to millions of Americans. In
addition, despite the downturn in the market in the last year, Americans increased their reliance
on mutual funds as a way of investing in stocks, bonds and money market instruments. This
trend has continued irrespective of the increase in the number of alternatives to traditional
mutual funds.
Mr. Glenn remarked that, in a year when so much has changed for us as a nation and
individually, certain things have held fast and true. He stated that “[t]he tremendous benefits
and protections enjoyed by mutual fund shareholders remain intact. Mutual funds continue to
be attractive to investors for the same reasons that have driven the growth of the industry for
decades – an unsurpassed combination of professional oversight, diversified portfolios, risk and
volatility management, affordability and innovative account services. And, unlike other pooled
investment products, the mutual fund industry has been untainted by major scandal for more
than 60 years.”
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Mutual funds continue to be viewed as long-term investments by shareholders,
according to Mr. Glenn. The fortitude of mutual fund investors during recent downturns
demonstrates the importance of educating investors, particularly on the importance of
diversification and the need for a long-term investment horizon. He stated that “education will
continue to be important, especially in light of the fact that greater responsibility for retirement
planning and saving for higher education is increasingly placed on individuals.”
Mr. Glenn closed by noting that the industry’s tradition of integrity and its tradition of
serving investors responsibly allows the industry to retain the respect of our regulators and,
most importantly, the trust of our shareholders. This tradition of integrity “provides mutual
fund shareholders with a measure of confidence in adverse, as well as prosperous, times.”
President’s Report
Matthew Fink, building on the meeting’s theme of Continuing a Tradition of Integrity in
Challenging Times, noted that the only way to ensure the continued integrity of our industry is to
judge every action on whether it is in the best interests of fund shareholders. Mr. Fink cited the
commitment of Paul Bartholet, the first president of the Institute, to this principle. In the 1940’s,
Mr. Bartholet urged the industry to: 1) take an active, pro-consumer approach to regulation; 2)
work with, not against, legislators and regulators who are concerned about the needs of fund
shareholders; and 3) put aside their differences and work together in support of high standards
that serve the interests of fund shareholders.
Evaluating the current state of the industry, Mr. Fink concluded that Mr. Bartholet
would likely be enormously proud to see that the principles he set forth sixty years ago are an
essential part of the mutual fund industry. However, he likely would warn us not to rest on our
laurels. Mr. Fink opined on the advice Mr. Bartholet might give the industry if he were here
today:
• continue to protect the safeguards of the 1940 Act that are essential to investor
confidence – diversification requirements, prohibitions against self-dealing, the
requirement to mark all assets to market, limits on leveraging, full and fair disclosure
and oversight by independent directors;
• continue to support regulation by a single agency – a strong, well-funded SEC;
• support continual regulatory modernization that does not compromise investor
protections;
• oppose increased risks to investors that arise from unwarranted exemptions from the
Act, including those that permit the expansion of unregulated hedge fund activity; and
• resist the efforts of outsiders who would use mutual funds for their own benefit at the
expense of fund shareholders, such as attempts to impose community reinvestment
requirements on mutual funds and requests that the SEC weaken its strident
requirements on money market fund investments. In addition, the industry should
continue its efforts to limit the use of the information on Form 13F by speculators and
arbitrageurs seeking to engage in abusive trading.
Mr. Fink noted that, in 1942, Mr. Bartholet gave a speech in which he emphasized the
industry’s continuing obligation to serve the many needs of small investors. As evidence of our
commitment to this goal, Mr. Fink cited the industry’s efforts to help middle class Americans
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save for retirement; our support of disclosure reform so that investors will be fully informed
about investment options; our support of legislation that would permit plan service providers
to offer advice to plan participants; and our support of clear disclosure about the tax
implications of Section 529 plans.
Going forward, Mr. Fink stressed, the success of the industry will depend on our ability
to reach out to and extend the benefits of mutual funds to all Americans; our commitment to
ensure that federal tax policies do not needlessly impede the ability of shareholders to achieve
their investing goals; and our support of reforms that make our markets more efficient,
transparent and fair. In closing, Mr. Fink surmised that Mr. Bartholet likely would agree that
“our most important responsibility is to continue the tradition of integrity that has been the
hallmark of our industry for more than 60 years.”
Marguerite C. Bateman
Associate Counsel