Joel Goldberg is a partner in the New York office of the law firm of Swidler Berlin Shereff Freedman LLP of Washington, D.C. His clients include mutual funds and advisers. Before going into private practice in 1983, Goldberg was director of the division of investment management of the Securities and Exchange Commission. He will be moderating a panel on SEC inspections and enforcement at the Mutual Funds and Investment Management Conference co-sponsored by the Federal Bar Association and the Investment Company Institute this week in Palm Desert, Calif. Goldberg recently discussed the SEC and its enforcement issues and policies with Mutual Fund Market News reporter Andrew Greene. An edited version of their conversation follows.
MFMN: What trends do you see in SEC compliance and enforcement? What issues, in particular, is the SEC watching?
Goldberg: There is a short-term answer and a long-term answer. The short-term answer is they are always looking for the problem du jour and at the moment they are interested in valuation issues. I know another thing they've been looking at, apparently, is performance information where a fund gives performance information to the end of the most recent quarter, but performance has been different since then. But that's the short-term answer, because whatever is hot next month, they'll be looking for then.
MFMN: Do you feel the SEC is going too far in regulating performance advertisements?
Goldberg: Yes. And I think they've taken a very dangerous path. There are a few things wrong with it. It's dangerous because once you tell companies they are at risk if they depart from a consistent practice, then you have chaos. If a company has consistently said, We're always going to use the end of the most recent quarter [in advertisements,]' and sometimes the fund is up and sometimes the fund is down, but [advertising] is done consistently, then you're not putting the fund management in a position where they have to make a judgement. [The SEC] is now saying that consistency won't necessarily save the day. [The SEC] is now suggesting that you have to make a decision at your own peril. The other thing wrong with it is it's completely contrary to the notion that past performance is no guarantee of future results. I think that implicit in the SEC's decision [to focus on this] is that past performance is an indicator of future performance, otherwise I don't know what the problem is, assuming there isn't any fraud.
MFMN: The SEC has announced that it will be offering additional guidance in this area in the form of a legal bulletin and possibly a rule proposal. What would you like to see included in that guidance?
Goldberg: I guess I would like to see some clear statement that would eliminate the chaos that results when you don't know what [the SEC] wants you to do. I almost don't care what they say as long as they say it and it's consistently applied. If they say, If the NAV has gone up more than X percent, or down more than X percent since the most recent quarter, then you have to update,' fine. They just need to make it clear and understandable and consistent, rather than what you now have where [funds] have been consistently following what they understood to be proper procedure and are now told that because of unusual market conditions, they should have to do something else. I think that is unacceptable. I think that the SEC should tell people what they want them to do and almost anything they say will be better than the uncertainty that exists now.
MFMN: And what long-term trends do you see evolving in SEC enforcement?
Goldberg: I think taking the longer view, there is an increasing tendency, which I don't think is a particularly good tendency, to make enforcement cases, or at least enforcement investigations, out of things that in years past would have been handled as regulatory matters. I think there is an increasing tendency, [in situations] where there is no wrong doing, where no one has enriched themselves at the expense of the fund and there may have been some honest mistakes, to have the SEC treat those situations as enforcement cases.
MFMN: And this marks a departure from the way the SEC acted when you were there?
Goldberg: Not necessarily when I was there, but let's say in years past, when I, and others, were there. I think that the original intent of the inspection program was to try to head off problems before they rose to enforcement cases - to get in there early and try to help a company solve its problem. If there was something not quite right that could lead to a problem, point that out and help the company solve it before it reached a level of enforcement. That was the original intent of the inspection program. And I think in more recent years, there has been some tendency on some parts of the staff - it's not everyone - to view an inspection as being similar to an enforcement investigation and If you find something wrong, let's see if we can make a case.' At some point, somebody has forgotten what the intent of the inspection program is, or originally was.
MFMN: Why do you think the SEC has taken this tack?
Goldberg: It could be that just with the growth of the mutual fund industry and the growth of its importance as an investing medium, the commission and staff feel that increased emphasis on enforcement is needed. And in the course of placing that increased emphasis, they might have overlooked the danger of trying to regulate through the enforcement process.
MFMN: It sounds like the SEC is trying to effect change in the industry through enforcement proceedings.
Goldberg: That's probably overstating it. I think that's what I'm suggesting, but not that strongly. I think the SEC has always had to strike a balance between regulating and issuing guidance in advance on the one hand, and using enforcement as a tool to make people comply, on the other hand. And I think there is probably now some tendency to make policy statements through enforcement actions rather than through rule making policy statements, and that's unfortunate. There is another reason it is unfortunate to place too much reliance on enforcement. If you use enforcement as a tool to tell the industry what SEC policy is, sometimes it's hard for the industry or the bar to know what a case was really about. A lot of cases are settled, the majority of them are. Obviously the settlement is a negotiation process, not only in terms of the sanction, but in terms of what the commission charges and what the respondent consents to. So it may be that the facts and the allegations in the consent order are very different from the facts that originally prompted the staff to the enforcement case. They will actually negotiate out certain statements of fact and certain allegations. So people see the consent order and they assume, Oh, this is very important,' but they don't know that, actually, the staff was more interested in something else and that got lost in the negotiation process.
MFMN: Do you feel there is increased tension today between the SEC and the fund industry?
Goldberg: No, I don't think there is overall increased tension. I think that this is still one of the most scandal-free industries there is in the financial world and the mutual fund industry has always been very cooperative with the SEC in terms of regulation and in terms of helping develop appropriate regulatory solutions to problems. What I'm referring to is individual companies that, for whatever reason, may fall out of bed with regard to a particular rule. I don't think it is handled as well as it might have been in the past, but it's not an industry-wide thing, it's just whoever has that problem at the moment.
MFMN: With a new chairman, can the fund industry expect the SEC to change?
Goldberg: It all depends on who the new chairman is and what his view is on how active a chairman should be in suggesting to the staff what approach to take. Some chairmen, I think Chairman Levitt was one of them, have been very active in suggesting policy directions for the division of investment management as well as other divisions. Other chairmen are more reticent and take the view that it is up to the staff to make recommendations. Also, different chairmen have different interests. Chairman Levitt did seem to be very interested in the mutual fund industry, other chairman might be interested in other areas