WASHINGTON - Kicking off the 2002 General Membership Meeting of the Investment Company Institute on the heels of recent scandals that have rocked the investment management and accounting industries, ICI President Matthew Fink told fund executives that the mutual fund industry was working hard to protect the interests of shareholders.

This year's meeting followed the recent Enron debacle, investigations into the dealings of securities firms and auditors and a sense among many investors that the truth is increasingly elusive when it comes to their investments.

Fink, who opened the industry group's biggest event of the year with a speech in front of hundreds of executives here, said that the fund business had consistently embraced "strong regulation that puts shareholders first."

He also cited the industry's growth, saying that since the Investment Company Act passed in 1940, U.S. mutual fund shareholders had grown in number from fewer than 500,000 to 93 million today.

But for all of Fink's uplifting words during a conference themed "Continuing a Tradition of Integrity in Challenging Times," the ICI president also said that there were many aspects of the fund business in need of reform. He said that shareholder reports need to be clarified, 401(k) investors should get better advice about their investments and IRA rules should be easier to understand.

Fink also attacked the hedge fund business, saying that the vehicles should be more strictly regulated. Fink said that broad exemptions enacted in 1996 that permit hedge funds to garner an unlimited number of investors so long as those individual investors meet minimums on investable assets have likely provided the vehicles too much leeway.

"In the past few years, we've witnessed an alarming increase in serious problems for investors in unregistered hedge funds, including bankruptcies, looting of assets, misleading accounting, deceitful communications and unscrupulous sales to less sophisticated investors," Fink said. "Despite these warning signs, some are suggesting that unregistered hedge funds should be given more of a green light. In my view, this is a recipe for potential disaster."

In addition, Fink said a form that fund companies must file regularly with the Securities and Exchange Commission, Form 13F, is obsolete and allows front-runners and professional traders to profit at the expense of shareholders.

The form, a routine filing, requires funds to list most of the equity stocks held in their portfolios. The SEC originally required the filing because it was concerned about hostile takeovers, Fink said. Now, the SEC doesn't need the filings anymore, he said, yet professional traders download the publicly accessible information and use it to "identify securities the funds may be acquiring or selling."

"The inescapable conclusion seems to be that 13F filings fuel abusive practices like frontrunning and freeriding that harm fund shareholders," Fink said. "We have urged the SEC to reevaluate the need for quarterly 13F filings."

Executives who heard the speech applauded Fink and the ICI for being vigilant about keeping the confidence of investors at a time when those investors aren't sure who is telling the truth.

"It's been kind of remarkable there hasn't been any major [fund industry] scandal all this time," said Gary MacDonald, director of marketing at State Street Global Advisors, of Boston.

"Trust is really the mortar that holds the financial edifice together," said Michael Carpenter, who heads sales for the broker/dealer marketplace at Rockville, Md.-based Rydex Funds. "If you begin losing trust, there are dramatic ramifications. As unsettling as those [scandals] are, where they come to light, they have a positive effect. People are refocusing on those trust issues."

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