Many Congressmen are finding out that when it comes to fund reform, "you can't always get what you want," as Mick Jagger sings.
The House overwhelmingly passed the "Baker bill" last November, and there are a number of reform bills pending in the Senate and the House. Yet there is little chance any fund reform legislation will make it through the Senate by year-end, if at all.
Richard Shelby, the Republican Senator from Alabama and chairman of the Senate Banking Committee, stands in the way of Senators Peter Fitzgerald (R-Ill.) and Jon Corzine (D-N.J.), both sponsors of different fund reform bills, and Rep. Paul Gillmore (R-Ohio), sponsor of a companion to Fitzgerald's bill in the House, from getting any satisfaction.
As chairman of the banking committee, Shelby wields incredible power, including the ability to block any fund legislation. Shelby, who initially indicated support for new fund laws, made the bold announcement a few months ago that Congress would defer to the Securities and Exchange Commission for the time being. "We should not rush to push legislation, not knowing what we're doing in a complicated area," Shelby said.
However, while some agree with Shelby's logic, critics say he is stonewalling congressional legislation and question his motivations. Fidelity Investments is Shelby's 20th-largest campaign contributor, at more than $31,000, according to a recent report in BusinessWeek. In fact, firm officials donated more than $13,000 to the Shelby camp at a Boston-area fundraiser a week before the Senator announced he was deferring to the SEC.
Shelby, a Democrat once upon a time and currently a "ranger" in the George W. Bush fundraising hierarchy, spoke with Money Management Executive Associate Editor Chris Frankie about the scandal engulfing the fund industry, his decision to defer to the SEC, Fidelity's contributions to his campaign and the upcoming elections.
MME: You were initially in favor of legislating reform in the fund industry, but that is no longer the case. What changed your mind?
Shelby: Well, we had 10 hearings. I had seen over the course of the first four, five, six hearings that there were deep problems with the mutual fund industry, and I was concerned about the SEC and its lack of involvement early on.
I have a lot of confidence in Bill Donaldson. I've supported him and the SEC. He specifically asked me and the committee to defer legislation, to give the SEC a chance to do its job.
Having said that, we will continue to monitor what they're doing, what changes they've made, how those changes have worked, and what will happen in the next five or six, seven months. If they don't do their job, we will do the job. But, I believe there is a good chance they are going to do their job and do it well. Do we still need legislation? I think we'd do better working with the SEC, working with their recommendations, and I believe that was the feeling of the Banking Committee, at least in the Senate.
MME: How short of a leash is the SEC on, since you're saying five to seven months?
Shelby: That's what we told them. Sen. Paul Sarbanes (D-Md.) and I both believe that oversight of our agencies is a very important part of our job. That includes oversight of the SEC, dealing with the mutual fund scandals, what reforms they propose, which ones they implement and how they're working. Will there be some need for legislation to close some gaps? Donaldson tells us no,' but at the end of the day we will have to hold hearings to find out, and we will certainly do that. We'll be back here in January or February, and we'll know what they've done. At the pace they're going, they're off to a real start, a good start.
MME: Some critics have claimed that Fidelity has too much influence on the Hill. You openly opposed the requiring of an independent chairman, a point Fidelity Chairman Ned Johnson had been very vocal about. While reports of the actual amounts vary, some say Fidelity has given $10,000 to your campaign and $39,000 to the Banking Committee this election cycle. Critics say this is a conflict of interest, especially since you are currently blocking Senate bills seeking reform. What is your response to those criticisms?
Shelby: First of all, I've got a long history of independence in the House and in the Senate. I'm not beholden to any group. I have been very fortunate in that I have a tremendous campaign fund for the size of my state: $11.5 million dollars.
I don't know everybody that gives me money. This would be a small amount in the throws of a campaign. It certainly wouldn't influence me in any way. I'm my own man and am always going to be. I'm certainly not interested in being anybody's advocate, other than the people's. You've seen my record. My record speaks for itself.
MME: What are the most important issues you will be looking for the SEC to address?
Shelby: Number one, and they've already shown it, is a determination to make sure that the mutual fund industry is well policed and works ethically on behalf of its shareholders. They have already ruled on the independent chairman. Some of us, including me, had questions as to whether the mandating of a chairman, when you had 75% of the directors independent, would take away from the power of the board members. But, they've done that, and let's see how it works. If it works for the benefit of the shareholders, that's good, and let's hope it does.
Some of the other things that I would like them to get into, of course, are corporate governance, ethics, conflicts of interest and disclosure practices. I believe that there is no better investor than one who has information they can understand and act on. Also, we'll be looking at their proposals addressing soft dollars and 12b-1 fees.
MME: That's a lot of work for them.
Shelby: A lot, but I have been pleasantly surprised at the leadership at the SEC in dealing with mutual funds starting last fall, but they have to keep it up, and I believe they know that.
One other thing, of course, is fees. I think the market should determine fees and the chairman of the SEC agrees with me on that -- not us legislating what people charge in the marketplace. But, that goes right back to the informed investor.
MME: So that means you are against including fee reductions in settlements like New York Attorney General Eliot Spitzer has done?
Shelby: I think that should be up to market forces. I don't like gouging, people taking advantage of me or anybody else, but there's nothing like an informed investor.
MME: Getting back to this independent chair rule, I know you had opposed mandating it. Now that the SEC has passed this rule, does it affect your confidence in the agency?
Shelby: I think it just strengthens it -- they're involved. I had raised the question, but I was not the only one to raise questions. A lot of firms have been managed well that have an independent chairman, but some that don't have independent chairman have not been involved in the scandals. My personal view is that the chairman of the board ought to be the best person, the most informed person, the one that meets all the requirements of leadership and knowledge for any company. But if the SEC has mandated that, and they have, we'll see how it works.
MME: Would you feel comfortable trusting your retirement to the industry knowing what you now know?
Shelby: Well, I don't have any mutual funds. My wife, a professor at Georgetown University in the business school, has had one account with Vanguard for years. She's not moved any money. She likes what they're doing, and I leave it up to her.
I think most Americans believe that with the SEC's help, the mutual fund industry will right itself. The stock market moving up, the economy improving, has certainly helped a lot of valuations. These hearings that we held helped spotlight a lot of stuff. I have always said we should not rush to judgment. We should not rush to push legislation, not knowing what we're doing in a complicated area. That's why we've had all those hearings. I believe holding those hearings has really augmented and given a lot of energy to the SEC.
MME: Where do you stand on the upcoming elections?
Shelby: Well, I'm for President Bush. He's got a lot of good things going for him as far as the economy. Obviously he has got to deal with Iraq. I'm hopeful it is going to improve. I believe he's got a good-to-excellent chance of getting reelected. I believe we have got some great opportunities in the Senate and to retain the Senate. We have got some dicey races, but have got some great opportunities in others.
We have got Illinois, we have got an open seat in Colorado we will have to win on the ground, and they will. In Alaska it's the same thing. We have got some great opportunities to pick up seats in North Carolina, South Carolina, Georgia, perhaps Louisiana and Florida, one or the other.
MME: How do you see the elections affecting any fund legislation?
Shelby: I don't see it affecting it. Sen. Sarbanes and I basically work together in a bipartisan way on a lot of things. Perhaps not on everything, but on mutual funds we totally agree.
MME: You have been a very prominent figure in probing the fund industry during revelations of scandal. What has surprised you or concerned you the most throughout the whole ordeal?
Shelby: The first surprise was that there were problems in the mutual fund industry -- that there was self-dealing, conflicts of interest, fraud --because heretofore mutual funds had always been perceived as a safe option for average investors. After all, there's over $7 trillion invested, and so many Americans put so much trust in mutual funds. It was more shocking to me than the corporate and the accounting scandals.
I think that's one thing that caught the SEC off guard. They were, if not asleep, taking a nap as far as the mutual fund industry is concerned. But, they're wide awake now.
MME: Under any circumstances do you see yourself supporting a fund reform bill?
Shelby: First of all, nothing's going to happen this year. We'd be lucky to pass an appropriations bill at the end of the day. Would I ever rule out passing meaningful legislation? Absolutely not. But let's wait and see what the SEC needs. If they need it and they want it and there's support for it, I'm going to be at the front of it.
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