[18054]
September 30, 2004
TO: BOARD OF GOVERNORS No. 61-04
CEOS
INVESTMENT COMPANY DIRECTORS No. 45-04
PRIMARY CONTACTS - MEMBER COMPLEX No. 88-04
SEC RULES MEMBERS No. 143-04
SMALL FUNDS MEMBERS No. 107-04
PUBLIC COMMUNICATIONS COMMITTEE No. 23-04
RE: INSTITUTE PRESIDENT ADDRESSES CONFERENCE OF WESTERN ATTORNEYS
GENERAL
The Institute’s President was recently invited to address a group of State Attorneys
General at a Financial Issues Summit that was sponsored by the Conference of Western
Attorneys General.* In light of the recent events, Paul Schott Stevens decided to focus his
remarks on four areas: (1) the reaction of the mutual fund industry to the scandal; (2) the ways
in which State and Federal law enforcement and other officials have responded to the scandal;
(3) Congress’s division of labor under the National Securities Market Improvements Act of 1996
(NSMIA); and (4) the importance of cooperation between the States and the Securities and
Exchange Commission to advance and protect the interests of fund investors. Mr. Stevens’s
comments in each of these areas are briefly summarized below. Before discussing each of these
areas, however, Mr. Stevens discussed the history of the Institute and its current mission; how
the U.S. has become a nation of investors, and more particularly a nation of mutual fund
investors; and how the attributes of mutual funds have resulted in their wide public acceptance
over the past 25 years.
THE FUND INDUSTRY’S RESPONSE TO THE SCANDAL
After characterizing recent events as “the worst scandal to hit mutual funds in more
than sixty years,” Mr. Stevens noted that the industry has neither sought to downplay the issues
nor to shift the blame for them. To the contrary, the industry has cooperated “as fully as
possible” in a wide array of efforts to address the problems, including: calling for tough law
enforcement; calling for full restitution to fund shareholders; urging the SEC to impose
* See Remarks of Paul Schott Stevens, President, Investment Company Institute, Conference of Western Attorneys General,
Financial Issues Summit (Sept. 30, 2004). A text copy of Mr. Stevens’s address is available on the Institute’s public
website at http://www.ici.org/statements/remarks/04_cwag_stevens_spch.html.
2
mandatory redemption fees and new trading restrictions targeted at abusive market timing and
late trading; and supporting the SEC’s various regulatory reforms. Mr. Stevens recognized the
industry’s collective stake in the success of public and private efforts to both root out
misconduct and preserve and bolster the confidence of investors and noted that “[w]e cannot
afford to see a recurrence of conduct that abuses the trust of mutual fund investors.”
THE ACTIONS OF STATE AND FEDERAL OFFICIALS TO THE SCANDAL
According to Mr. Stevens, the government’s response to the scandal “should be highly
reassuring” because State and Federal law enforcement officials acted promptly to identify and
punish misconduct, to deter it from happening again, and to hold investors harmless. He
described it as “significant” that trading abuses were first identified by a State Attorney General
and that senior State officials have taken steps pursuant to their enforcement authority to
protect investors in their jurisdictions from fraudulent practices. While observing that “there is
no perceptible gap in existing laws,” he noted that the SEC, “with an eye towards the needs of a
national marketplace,” has crafted and is imposing a comprehensive set of additional
regulations in response to the scandals. Also, however, market forces have responded to the
scandal as demonstrated by the fact that companies named in investigations or enforcement
actions have experienced a combined outflow of $9.4 billion per month in their bond and stock
funds from September through March of this year; while other companies not named in these
actions have registered a combined in-flow of $35.3 billion per month over this same period.
NSMIA’S ALLOCATION OF RESPONSIBILITY
Mr. Stevens next discussed how, in his view, the recent scandal has demonstrated that
NSMIA is working as intended. After discussing NSMIA’s division of labor – with the SEC
assigned exclusive responsibility to regulate mutual funds and the States having authority to
regulate and bring enforcement actions with respect to fraud and deceit – he noted that,
consistent with NSMIA, the States have wielded their remedial, anti-fraud authority to good
effect. At the same time, the SEC has exercised its prescriptive, regulatory authority to impose
new, comprehensive nationwide standards on mutual funds to address the abuses identified in
the scandal. According to Mr. Stevens, “the scandal has not been . . . the occasion for divergent
and inconsistent regulatory responses by different States. Responses of this sort characterized
State regulation of mutual funds prior to 1996 and ultimately led to the enactment of NSMIA.”
NECESSITY OF CLOSE COORDINATION BETWEEN THE STATES AND THE SEC
With respect to the importance of Federal-State cooperation, Mr. Stevens stated that it is
“absolutely essential” that the SEC and the States “cooperate closely, both in the law
enforcement realm and on matters of regulatory policy.” While some State officials may
suggest it desirable for States to modify or add to the body of Federal mutual fund regulation –
for example, through States attempting to impose new disclosures on mutual funds – he
asserted that NSMIA provides the most effective framework for advancing the interests of
mutual fund investors. In particular, NSMIA’s framework should “be respected by operating to
encourage a vigorous, continuing dialogue between the SEC and responsible State officials on
issues” of concern to the States. He also noted that the SEC “has proved highly receptive to
improvements in fund regulation, especially in the area of disclosure practices.”
3
* * * *
In closing, Mr. Stevens emphasized the commitment of the Institute and its members to
protecting the interests of fund investors in the States represented by the Conference and
nationwide. He also expressed his interest in working with State regulators on this very
important objective.
Tamara K. Salmon
Senior Associate Counsel