Conference Call: ICI head speaks out against intense regulatory push

The mutual fund industry is feeling picked on.

In a speech at a conference for fund lawyers last week, Matthew P. Fink, president of the Investment Company Institute in Washington, criticized the Securities and Exchange Commission and lawmakers for being overzealous in their recent focus on the fund industry. Mr. Fink suggested that regulators may be creating a “regulatory bubble” by imposing, or proposing, a host of new regulations aimed at the fund industry.

“Just like the long bull market that preceded it, a long bear market can distort how we assess the need for regulation,” he said. “In the midst of an extensive decline in securities prices, and costly scandals, it’s easy to lose sight of the fact that more regulation is not always better regulation.”

Mr. Fink’s pointed comments mark the first time the high-profile executive has publicly raised doubts about whether regulators are going too far in their efforts to restore investor confidence by cracking down on the fund industry. The industry, as he pointed out, hasn’t had a major scandal in the more than 60 years it has been in existence.

In recent months, regulators have either adopted or proposed a laundry list of rules aimed at improving how funds are governed. Earlier this year, the SEC overrode a wave of opposition from within the fund industry and passed a rule requiring portfolio managers to disclose how they vote stock proxies.

The SEC is also considering a proposal that would require funds to reveal their stock holdings every quarter instead of every six months. And it is weighing another proposal that would force fund companies to adopt more-stringent internal controls and hire compliance officers.

The commission is even flirting with the controversial idea of creating a self-regulatory organization to oversee the fund industry.

Two weeks ago, Rep. Richard H. Baker, chairman of the House Financial Services subcommittee on capital markets, sent a letter to SEC Chairman William H. Donaldson asking the commission to examine mutual fund fees. The Louisiana Republican also wants the SEC to look into other industry practices, including the charging of 12(b)-1 fees.

“Though it wasn’t clear to everybody at the time, we now recognize that we experienced a stock market bubble in the late 1990s,” Mr. Fink said. “Today, we need to guard against the possible emergence of a regulatory bubble.”

Mr. Fink made his comments Monday at the opening of the 2003 Mutual Funds and Investment Management Conference, which was held in Palm Desert, Calif. The three-day conference was co-sponsored by the ICI and the Federal Bar Association.

About 1,200 people attended the conference, up 20% from the approximately 1,000 attendees last year. The increase no doubt was a reflection of the increased attention being paid to fund regulation.

Paul F. Roye, director of the SEC’s division of investment management, acknowledged that the fund industry has been barraged by new regulations.

“We do have to be mindful of overkill,” Mr. Roye said. “But a lot of what we’ve had to do has been mandated by Congress.”

In a speech that immediately followed Mr. Fink’s, Mr. Roye outlined what he called “a new era of accountability” for the fund industry. That era, he said, is being spurred by last year’s wave of corporate scandals.

“While there can be a debate as to whether or not mutual funds were part of the problem, there’s no doubt that mutual funds must be part of the solution,” Mr. Roye said. “Investors, who have suffered big losses, are demanding accountability, and therefore the Congress is demanding accountability.”

He also berated industry executives for their fierce opposition to having to disclose proxy-voting guidelines as well as specific proxy votes.

“At the risk of further opposing those opposed to further disclosure, I would submit to you that on this matter, the fund industry was asking the wrong question,” Mr. Roye said. “The question should not have been whether or not mutual funds are the only institutional investor required to make this disclosure, but at this difficult time, what role can we play in improving the governance of America’s corporations?”