WASHINGTON -- Matt Fink didn't exactly go gentle into that good night during his last days at the helm.

The Investment Company Institute president of 13 years made his last public appearance at the mutual fund trade group's General Membership Meeting here and took a series of tough questions from CNBC correspondent Tyler Mathisen just days before his retirement. The discussion was a departure from the typical rhetoric the industry has heard from the ICI skipper in the past, particularly those leading up to the uncovering of a widespread trading scandal that has rocked the $7.5 trillion industry.

A Little Chin Music

Mathisen wasted no time hurling some fastballs up around the chin, thundering away at Fink about what led to the wave of impropriety that left the biggest fund shops tarnished and senior executives being led away in handcuffs. The query prompted a very candid response from Fink, who characterized the egregious behavior at fund companies as the product of "simple greed" and "arrogance." On top of that, he pointed to the role of regulators, saying that a "weakened, understaffed SEC" only served to fuel the fire in that a "cop not on the beat" emboldened those who chose to put their own interests before fund shareholders.

When asked if shareholder interests were aligned with investors, Fink noted "there are instances where they diverge." In his opinion, the best way to eliminate conflicts of interest is having a chief compliance officer report directly to an independent board of directors. Under new SEC rules, every fund complex must designate a chief compliance officer to serve as liaison to the board to keep them well informed on the internal policies and procedures of its funds. The rule will take effect October 1.

Perhaps the most controversial topic centered on whether funds should have an independent chairman. Fink's body language quickly changed as he shifted in his seat, crossed his arms and bit his lip as he pondered a cogent response. The proposed independent chairman rule was one that really has the ICI and fund giant Fidelity Investments up in arms, with both parties seeing it as a threat to their power.

Fink sees this proposal as "a blow to independent directors" in that it basically says, "We don't trust you to choose your chairman." He argued that under existing rules of the Investment Company Act of 1940, non-independent chairmen cannot be a part of the fee negotiation process including the use of 12b-1 fees. He also addressed the notion that trustees sit on too many fund boards to do their job effectively by saying that most problems are not fund-specific and tend to cut across all funds.

Also at issue was the definition of fiduciary duty, one that has been widely criticized for not being explicit. The 64-year old legislation recites a fiduciary duty, but critics such as Sen. Peter Fitzgerald (R-IL) argue it doesn't provide any content for that fiduciary duty or any means of enforcing it. In fact, only Congress can strengthen the fiduciary duties of fund directors and the directors of asset managers. Fink argued that the 40 Act already addresses fiduciary duty and that conflicts of interest are a "part of life." What is important, he said, is how funds deal with those conflicts of interest.

More Not Necessarily Better

On the issue of transparency, Mathisen asked Fink to rate the industry on a scale of one to 10, to which he replied "seven or eight." Fink acknowledged that transparency must be improved in order to bolster investor confidence and restore trust, but cautioned against not painting transparency and disclosure with the same broad stroke. "More disclosure can obscure transparency," he said. Increasing the size of the prospectus to accommodate more disclosure would only hurt fund shareholders, he added.

Another divisive issue is the proposed changes to portfolio manager and board member compensation. A recent SEC proposal would force funds to disclose additional information about their portfolio managers, including other accounts they manage, their compensation in dollar amounts and ownership of securities in accounts they manage.

Fink scoffed at the notion that this would help the industry, arguing that it would lead to a "talent drain," one that would incite "curiosity and titillation" among fund managers who could go to a hedge fund and not have to disclose that information. "You will dumb down [and] commoditize the fund business," Fink said. "Entrepreneurs will not enter the business." He further argued that the compensation rule already has small fund shops thinking about exiting the business.

As the conversation progressed, Mathisen didn't hold any punches when he asked about proxy-voting disclosure, a battle the ICI fought tooth and nail but ultimately lost. He demanded that Fink justify the reason for withholding proxy voting records from the shareholders, implying that they deserve to know how folks are voting on issues that impact how their money is being run. Fink pointed to the fact that Harvard University does not disclose how they vote their proxies and it receives alumni donations. The American Red Cross also doesn't disclose that information. Mathisen countered that sort of logic doesn't make a heck of a lot of sense, considering that one is an educational institution and the other is a not-for-profit charity organization, whereas mutual funds have a fiduciary duty to their shareholders.

While Fink wielded his axe as ICI president for the last time, he did stress repeatedly the importance of putting shareholders first and maintaining a commitment to fiduciary culture, an ideology that helped grow the fund business from its infancy stage but somehow was lost along the way. He advocated more stringent regulation and stiffer penalties for those who violate the law including imposing lifelong bans from the business. He also urged the media to look at industry critics with "a degree of skepticism" and evaluate their motivations. Most importantly though, he told his constituents to "step up and take responsibility," an approach that he believes will ensure the prosperity of mutual funds.

Paul Stevens will take the reins as new ICI president on June 1.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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