May 20, 1994
TO: BOARD OF GOVERNORS NO. 43-94
SEC RULES MEMBERS NO. 36-94
RE: CHAIRMAN LEVITT'S REMARKS AT INSTITUTE'S GENERAL MEMBERSHIP
MEETING
__________________________________________________________
SEC Chairman Arthur Levitt delivered a keynote speech this
week at the Institute's General Membership Meeting. Chairman
Levitt first addressed the issue of personal trading by portfolio
managers and then discussed four issues that he believes deserve
"increased vigilance" by the SEC and the industry: fund investment
in derivative products; investor communications; portfolio
liquidity; and compliance systems. His remarks, a copy of which is
attached, are summarized below.
Personal Investing
Chairman Levitt stated that the SEC was pleased with the
recommendations of the Institute's Advisory Group on Personal
Investing and specifically remarked that "[t]hey go a long way
toward responding to our concerns." He cautioned that in order to
maintain investors' confidence and trust in the mutual fund
industry it is necessary to take appropriate steps to avoid even
the appearance of a conflict. In this regard, he noted that the
Advisory Group's Report should provide fund managers with the
appropriate guidance. Chairman Levitt stated that the results of
the SEC's survey of portfolio managers' trading activities should
be available in a few weeks.
Derivatives
In view of the proliferation of derivative financial
instruments and their lack of a clear track record in times of
market stress, Chairman Levitt stated that they are an important
subject of inquiry. He noted that the recent uncertainty about
interest rates has heightened the concerns about the use of
derivatives by funds.
Specifically, Chairman Levitt stated that funds should
"satisfy themselves that portfolio managers have the expertise to
handle them -- that their uses are in keeping with the fund's
policies -- that appropriate limits are set and observed -- and
that managers are not blinded to their risks." In addition,
pricing issues, trading strategies, accounting questions, and
internal controls need to be examined closely.
Chairman Levitt warned that the use of derivatives by money
market funds merits special attention. In this regard, funds
should look closely at those financially engineered instruments
that may be able to achieve their intended results only in a stable
interest rate environment. He noted that the Commission staff has
been questioning the appropriateness of these instruments for money
market funds during the past two and a half years.
Finally, he expressed concern about the adequacy of the
disclosure relating to derivatives in mutual fund prospectuses. He
recommended that funds go a step beyond meeting the technical
requirements and "ask if the prospectus scrupulously describes
investment risk, and in an understandable way."
Investor Communications
Chairman Levitt stressed the need to ensure that all
communications with investors and potential investors meet consumer
needs. He also stated that he has asked the SEC's new Consumer
Affairs Advisory Committee to consider the summary prospectus
proposal.
Liquidity
Briefly discussing the issue of liquidity, Chairman Levitt
identified some questions that funds need to consider in making a
liquidity determination and stressed that "a fund needs to satisfy
not only today's liquidity requirements, but has to be prepared to
meet redemptions under a variety of market conditions."
Compliance Systems
Chairman Levitt described several compliance initiatives that
the SEC is considering, such as increasing the amount of
information required to be reported to the SEC about fund
portfolios and requiring that each fund designate an individual to
be responsible for overseeing the fund's compliance activities. He
stated, however, that "in the final analysis, compliance is the
princial responsibility not of the Commission, but of each
investment company."
Matthew P. Fink
President
Attachment