[15881]
April 9, 2003
TO: BOARD OF GOVERNORS No. 20-03
DIRECTOR SERVICES COMMITTEE No. 6-03
PRIMARY CONTACTS - MEMBER COMPLEX No. 30-03
SEC RULES MEMBERS No. 44-03
RE: FINK AND ROYE REMARKS AT 2003 MUTUAL FUNDS CONFERENCE
Institute President Matthew P. Fink and Paul F. Roye, Director of the Securities and
Exchange Commission’s Division of Investment Management, each delivered a keynote address
at the 2003 Mutual Funds and Investment Management Conference. Copies of their speeches
are attached, and they are summarized below.
Matthew Fink’s Address
In his address, Mr. Fink noted that the SEC staff has completed one of the busiest and
most demanding years in SEC history. The industry has been working intensely to keep pace,
he said, and, together, we have been dedicated to restoring investor confidence. Despite the
challenges faced by fund companies and their equity fund shareholders over the past 37
months, Fink observed that the mutual fund industry continues to serve investors well.
Fink offered that the mutual fund industry has earned the confidence of millions of
investors because we have made protecting shareholders our first priority. Toward that end,
we have resisted efforts to weaken the 1940 Act and the investor protections it offers, we have
supported tough new SEC restrictions, and we have adopted voluntary standards in areas such
as personal investing and fund governance.
Fink pointed out that, contrary to some industries, the mutual fund industry has
supported regulation when it was warranted, including support for the enactment of the
Sarbanes-Oxley Act. It likewise has endorsed a series of regulatory reforms, including those
relating to disclosure of portfolio holdings and fund fees in shareholder reports. However, Fink
urged regulators to resist unnecessary regulation that might distort decision-making and chill
innovations in a manner that would be harmful to fund investors.
Fink discussed the current focus on fund fees. He cited a recent GAO report, which
confirmed the existence of positive fee trends that, over the long-term, have produced
substantially lower costs for fund shareholders. The report noted that, as assets in some equity
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funds declined, the expense ratios increased slightly. Fink observed that this is consistent with
earlier findings relating to economies of scale.
Fink also mentioned recent letters from Congress to the SEC on various aspects of the
mutual fund industry. He stated that the industry stands ready to provide information and
assistance, and remains open to regulatory changes that will inform, rather than confuse, fund
investors. He expressed reservations about the SEC’s initiative to re-examine the desirability of
creating a mutual fund self-regulatory organization. According to Fink, strong day-to-day
regulation by the SEC has kept the fund industry strong and free from systemic scandal. To
continue this tradition, the industry supports adequate funding for the SEC.
Although effective SEC regulation and oversight are “front and center,” Fink
highlighted the industry’s interest in other systems of regulation that may advance the interests
of our shareholders. Citing as an example personal savings and retirement, Fink expressed
support for the Bush Administration’s plan to simplify the system for long-term saving in this
country. Similarly, he noted the industry’s support for various pieces of legislation that would
allow 401(k) participants to receive advice, defer taxes on reinvested capital gains until fund
shares are sold, and eliminate double taxation of dividends.
In closing, Fink noted that the industry has embraced comprehensive pro-investor
regulation and has been a strong supporter of the SEC’s mission to protect investors. He
exhorted industry participants to keep up the good work. “By putting our shareholders first –
in both good and difficult times – I have no doubt that our shareholders and our industry will
prosper.”
Paul Roye’s Remarks
Mr. Roye began his remarks by noting that we have recently experienced a very difficult
period in the history of our nation’s securities markets that has resulted in many investors
losing confidence in the fairness of our markets. While there are those who would debate
whether mutual funds were part of the problem, according to Mr. Roye, there is no doubt that
mutual funds must be part of the solution. He noted that investors are demanding
accountability and, in order to restore their trust, investors must see a new respect for honesty,
integrity, transparency and accountability.
Mr. Roye discussed various recent initiatives to promote responsibility and focus
attention on meeting the needs of America’s investors. These have included the Sarbanes-Oxley
Act and related rulemaking. He noted that the Commission has striven to define the
requirements of this legislation for the fund industry and ensure that fund investors benefit
from the Act’s tenets of fair-dealing, responsible management, and meaningful oversight.
Accordingly, the Commission has adopted rules under the Act that, in part, are intended to
reinforce that funds’ key officers are accountable for their funds’ financial statements and for
their own actions and to ensure that such officers understand the full extent of their
responsibilities.
Mr. Roye also noted that the requirements under the Sarbanes-Oxley Act dovetail with
the efforts undertaken by the fund industry and the Commission a few years ago to improve the
effectiveness of mutual fund independent directors. He expressed his view that the industry
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should take great pride in knowing that it was ahead of the curve in recognizing the crucial role
that independent directors play in promoting compliance with the federal securities laws and
ensuring that investor interests remain paramount in the boardroom. He noted, however, that
the important role of gatekeepers does not end with independent directors but must also
include both independent public accountants and attorneys to mutual funds.
Mr. Roye next discussed some of the Commission’s recent rulemaking initiatives. He
noted that the fund industry largely opposed the Commission requiring funds to disclose their
proxy voting records. In his view, however, the criticism of the proposal largely overshadowed
the fact that the Commission made significant adjustments to the proposed rules to
accommodate industry concerns. Rather than questioning why mutual funds are the only
institutional investors required to make this disclosure, Mr. Roye encouraged them to ask what
role they can play in improving the governance of America’s corporations and how the fund
industry can be a leader in this area. He noted that transparency of the proxy voting process
should foster investor confidence in the mutual fund industry.
The next Commission rulemaking initiatives he mentioned were the pending rule
proposals to improve shareholder report presentations and to modernize fund advertising
rules, each of which have components designed to foster a greater level of accountability. He
noted that the recent Commission rule proposal on compliance programs and compliance
officers also underscores the Commission’s focus on accountability. To those who question
why the Commission is considering the compliance rule proposal now, he noted that the
Commission wants to take steps to prevent the types of scandals that have plagued other
segments of the securities industry from tainting the investment management industry. He
noted that many of the Commission’s enforcement cases in the investment management area
are often the result of weak or nonexistent compliance controls. If adopted, the proposed rules
would protect investors by improving day-to-day compliance with the federal securities laws,
while at the same time increasing the efficiency and effectiveness of the Commission’s
examination program.
He noted that the compliance policies and procedures proposal has been largely
overshadowed by the request for comment on the advisability of additional private sector
involvement in promoting fund and adviser compliance with the federal securities laws.
According to Mr. Roye, requesting comment on these additional initiatives does not necessarily
indicate that implementing additional forms of oversight is the approach the Commission
ultimately will take. Instead, the Commission believes it important to advance a public
dialogue on these issues in order to determine whether the regulatory oversight scheme can be
improved in the best interest of investors.
In addition to rulemaking activity, Mr. Roye noted that the Commission has undertaken
two other initiatives that are, in part, focused on promoting accountability in the investment
management area. The first involves addressing the problems outlined in the report recently
published by the Commission, the NASD, and the NYSE relating to significant failures in
delivering breakpoint sales load discounts to mutual fund investors. He noted that funds have
a role in ensuring that breakpoints are disclosed in a clear and understandable manner, “and
fund directors have a role in overseeing how their funds are sold.” He noted that a working
group, which includes the Institute, the NASD, and the Securities Industry Association, has
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been formed to address deficiencies in the current structure under which breakpoints are
calculated and applied.
The second initiative he mentioned is the Commission’s fact finding regarding hedge
funds. He noted that, for many hedge funds, the only level of accountability to which they are
subject under the federal securities laws are the anti-fraud provisions enforced by the
Commission and private litigants. The Commission is reviewing whether there should be
greater oversight and accountability of these funds and plans to hold a public roundtable on
hedge funds on May 14th and 15th. They welcome the submission of written comments on the
issue.
Mr. Roye next mentioned Congressional interest in the mutual fund industry. He noted
that, subsequent to the recent mutual fund fee hearings held by a subcommittee of the House
Financial Services Committee, SEC Chairman Donaldson received a letter from Subcommittee
Chairman Richard Baker and a letter from Congressmen Paul Kanjorski and Robert Ney raising
various accountability issues. These letter have requested the Commission’s views, including
recommendations for legislative and/or regulatory actions, on a variety of issues including fee
transparency, transaction costs, soft dollars, rule 12b-1 fees, fee levels, revenue-sharing
payments, fund performance disclosure, and the role of independent directors in overseeing
fund fees.
Mr. Roye then discussed efforts within the Division of Investment Management to
improve the efficiency of their operation. He noted that the Division plans to seek permission
from the Commission to implement a new exemptive application “triage” system that would
eliminate full review for applications containing an attorney’s certification that the relief
requested is materially the same as relief previously provided to a similar applicant. The
Division also plans to institute a new system of refusing to process applications that contain
insufficient factual or legal analysis.
Mr. Roye next noted that every fund organization must be accountable for its business
decisions and the impact they have on investors. While the mutual fund industry “has an
excellent record of being innovative and has created many commendable products and product
features,” in his view, not all new fund ideas are good for investors or the industry and he
expressed concern “that there may be a herd mentality on the part of some in the industry, with
some organizations taking a ‘fund of the month’ approach to marketing and following the latest
fad in the new type of fund or feature being offered.” He encouraged fund organizations to
question whether new products are truly good for investors and whether they will meet a
legitimate need. He challenged the industry “to ask the tough questions” and “to put on the
brakes” when the fund organization “seems swept away in a tide of enthusiasm over the latest
investment fad.”
In closing, Mr. Roye expressed his view that, if we keep in mind that we are accountable
to America’s investors, the fund industry and its regulators can persevere through this difficult
period in our nation’s markets and restore confidence. While the fund industry “can be proud
of its history of promoting a culture of honesty, integrity, transparency, and accountability and
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also . . . of its commitment to strong fund governance and compliance practices,” the industry
cannot rest on past accomplishments. Instead, industry participants must continue to be leaders
in the establishment of fair, ethical, and investor-oriented business practices.
Marguerite C. Bateman
Senior Associate Counsel
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attachments for memo 15881.
Attachment no. 1 (in .pdf format)