With lawmakers in Washington calling for Securities and Exchange Commission Chairman Harvey Pitt's resignation, fund executives said the mutual fund industry is likely to support the embattled regulator.
The executives' comments came last week as a debate gains steam over Pitt's suitability for the job. Some lawmakers question Pitt's ability to prevent stock and accounting scandals at firms such as WorldCom and Enron from rocking Wall Street and battering investor confidence any further. Last week the Dow was at its lowest levels since September.
But despite the criticism, fund executives said the industry is confident so far in Pitt's ability to regulate corporate fraud without imposing too many new regulations on the industry.
"My sense is that the industry will stand behind Harvey," said Geoffrey Bobroff, a well-known mutual fund consultant based in East Greenwich, R.I. "I think the industry is comfortable with Harvey being in there versus an aggressive, enforcement-minded" SEC chairman. While firm, particularly on such issues as 12b-1 fees, Pitt tends to take a moderate approach to mutual fund regulation, and many fund executives fear a replacement who "shoots first and then asks questions later," Bobroff said.
The Bush administration, meanwhile, said it will continue to support Pitt. The industry's chief lobby group, the Investment Company Institute, had no comment on the matter at press time.
Pitt responded to the criticism last week with an aggressive media tour during which he appeared on several national television shows and said he would not resign. "I'm the right person for the job," he said.
Still, Wall Street's scandals have become a key topic among fund executives concerned that plummeting confidence in the truthfulness of corporate earnings is causing investors to shy away from equity markets and mutual funds. While many accounting and investment management professionals would prefer that the government continue to allow the private sector to police itself, there is a growing realization that some kind of acquiescence to stricter SEC regulation needs to be made to ensure that such scandals don't erupt again.
Lowell Smith, a 401(k) consultant based in Philadelphia, believes a combination of both a more vigilant private sector and SEC is the answer - and adds that the onus should not be on Pitt, who, he believes, has little to do with the prospect of restoring investor confidence. Instead, Smith said, confidence will likely be restored by more rigorous accounting policies in the private sector and an empowered SEC.
"I think it's going to have to be a combination of not just Pitt [and the SEC], but the corporations themselves," Smith said.
Tough Mutual Fund Stance?
Compounding matters, the SEC chairman, who has held the post since August, gave a tough speech at the ICI's General Meeting in May. Some executives took the speech as a signal that Pitt would crack down on the mutual fund industry.
For example, Pitt told fund executives that he would likely review the distribution charges, known as 12b-1 fees, that fund companies charge shareholders. The 12b-1 was intended to be a temporary measure that would help firms achieve economies of scale via expanded marketing budgets. Instead, the fees have become a permanent source of revenue, Pitt said.
But Bobroff said the 12b-1 will likely survive an SEC review. The issue of whether companies will be able to charge the fees in the future is not dire enough to spark anger among executives, Bobroff said. "I don't think the industry's issue of Oh my God, Harvey's going to look at 12b-1' is one that would cause the industry to withdraw its support for him," he said.
If Pitt is going to crack down on the fund business, so be it, said one fund executive, who asked to remain anonymous.
Mutual funds should face the same SEC scrutiny as any other sector of the corporate universe, he said. "The way I heard it, [Pitt] intends to get tough on everyone," the executive said. "I don't see why we should be exempt from that list."
And, while lawmakers bemoan Pitt's corporate ties, fund executives said that experience could be Pitt's greatest asset in stopping the scandals. Pitt, 57, held various regulatory posts at the SEC throughout the 1970s before joining the Washington law firm Fried, Frank, Harris, Shriver & Jacobson, where he worked with many large corporations.
"What he's saying is that his experience in the industry as a representative for these companies allows him to know where the bodies are buried," the executive said. "What better person to have to regulate these companies? If you wanted to hire somebody to build a burglar alarm, you'd hire a thief, right?"
That said, the fund business isn't likely to celebrate all of the regulatory changes that Pitt imposes. For example, Bobroff said recent changes in the way companies must report per-share earnings could hurt funds in the short run. Because markets are turbulent, the earnings statements are likely to dampen the value of equities. Fund values will correspondingly decline until markets recover, he said.
But in the long run, Bobroff said the regulations will result in more accurate earnings statements, and when the markets recover, investors will be more confident in the accuracy of a company's stated value.
"The fund industry has to hope for a turn [in the markets] at some point, but it wants a turn based on investor confidence, not because earnings are being inflated," Bobroff said. "The fund industry has to hope that investor confidence will have been overcome because it is a serious concern for the long-term health of the industry."