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| 2003
News and Press Releases |
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HEADLINE:
Donaldson: SEC's Priority Is Reforming Mutual Fund Industry
By: Lynn Hume
The Bond Buyer. November 19, 2003, Wednesday
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EXCERPT: Securities and Exchange Commission chairman William H. Donaldson yesterday outlined a series of mutual fund regulatory initiatives, investigations, and studies that the agency has under way or is preparing to undertake to ensure that fund investors are accorded certain rights and protections. He made the disclosures at a hearing on mutual funds held by the Senate Banking Committee, stressing that fixing the problems in the mutual fund industry is the SEC's number one priority. Donaldson also described a new risk-management program and office that the commission is establishing under a "Doctrine of No Surprises" to try to anticipate, rather than having to react to, new forms of wrongdoing and other problems in all of the financial markets. In addition, Donaldson defended the SEC's recent settlement of securities fraud with Boston-based Putnam Investment Management LLC over alleged self-dealing in the face of complaints by some state regulators and others that the settlement did not go far enough and did not require fee disclosures. The criticism is "misguided and misinformed and obscures the settlement's fundamental significance," Donaldson charged, stressing the settlement does not preclude further enforcement action. "Those lacking rule-making authority seem to want to shoehorn the consideration of the fee-disclosure issues into the settlement of lawsuits about other subjects. But we should not use the threat of civil or criminal prosecution to extract concessions that have nothing to do with the alleged violations of the law," he said. Donaldson's remarks came as Senate Banking Committee members expressed concerns about the widening scandals of the mutual fund industry, the SEC's ability to address such problems, the seeming lack of coordination between federal and state regulators on enforcement cases, and the need for regulatory and legislative reforms. "It has become apparent that many of the questionable fund practices that are now being examined are not the result of a few bad actors, but are long-standing industry practices that have largely gone unregulated and not well disclosed to, or understood by, most investors," said Sen. Richard Shelby, R-Ala., the committee chairman. Shelby noted that while some abusive fund practices such as late trading are illegal, "these activities continued unabated because of inadequate compliance and enforcement regimes at the SEC, the mutual funds, and brokers." Sen. Jon Corzine, D-N.J., said the mutual fund scandals are the "most serious scandals in any marketplace" because of the 95 million retail investors involved. "I think action will be needed" if the mutual fund industry is to prosper, he said. Sns. Corzine and Christopher Dodd, D-Conn., are expected to introduce a bill this week that would apply Sarbanes-Oxley Act-type reforms to mutual fund companies. The full House is expected to consider a mutual fund reform bill tomorrow that is sponsored by Reps. Richard Baker, R-La. and Michael Oxley, R-Ohio. Oxley chairs the House Financial Services Committee, and Baker heads its capital markets panel. The Corzine/Dodd bill, similar in some respects to legislation introduced recently by Reps. Daniel Akaka, D-Hawaii, and Peter Fitzgerald, R-Ill., would call for the possible creation of a Mutual Fund Oversight Board -- something William McDonough, the head of the Public Company Accounting Oversight Board for corporations, recently endorsed. But Donaldson urged the lawmakers yesterday to give the SEC's reforms and initiatives a chance to work "before going with the expense of a whole new regulatory entity." Donaldson said that the SEC on Dec. 3 will consider adopting new rules to ensure mutual funds have strong compliance programs. At that meeting, the SEC staff will recommend rules to prevent funds from selectively disclosing a fund's portfolio to large investors will consider staff proposals to prevent late trading and market timing abuses. It will also stress the importance of fair value pricing. Also in December, the SEC will consider a proposal to improve disclosure to investors about the breakpoint, or volume discounts, for which they may qualify, Donaldson said.
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