Directors have never been more critical to the future of the mutual fund industry as they are today, and it's not just because the directors of firms such as Enron are on the hot seat, attests Arthur Levitt, former chairman of the Securities and Exchange Commission. Fees need to come down, service standards must rise, and a genuine concern for the investor needs to override the business of running and profiting from a fund complex. These are just some of the words of wisdom Levitt offers in his new book, Take on the Street (Pantheon).

Here, Levitt, whose patrician manners belie his Brooklyn upbringing, discusses fund governance in part II of an interview with Financial Planning Executive Editor Richard Koreto, On Wall Street Senior Editor Tony Chapelle and Mutual Fund Market News Editor Lee Barney [see MFMN 9/23/02].

A recent report in Forbes magazine noted that the average mutual fund director earns nearly $250,000 a year and that they recently voted themselves a 26% pay raise, even as the average equity fund investor has lost 13% over the past year. Care to comment?

I've known fund directors, many of them, and none of them get even $100,000. For those who are being compensated that much, though, the amount is so excessive that it cannot help but create an impression that the interests of board members are more closely aligned with management than with the shareholders they are intended to protect.

How effectively do you think mutual fund directors are doing their job?

It varies. Some mutual fund directors do a very conscientious job, and some view their service on the board in a very routine fashion. Some are there just as rubber stamps for management.

The material that confronts a mutual fund director sometimes is so voluminous, so technically oriented, that a director who isn't really diligent can find himself just going along with management.

And, I'm concerned that mutual fund directors rarely change advisors or hold them accountable for bad performance.

Are fund companies doing enough on the side of investors? Are they disclosing holdings frequently enough? Revealing fees clearly enough? Making note of portfolio manager changes? Allowing for misuse of 12(b)-1 fees? Etc.?

Yes, there can be more disclosure. And if a fund changes its emphasis, that's an important area to be revealed. I also think that 12(b)-1 fees have been abused. As well, I have reservations about the "favored-fund" status given by many resellers based upon the fund's paying fees to those resellers. That does a great disservice to investors, only to possibly later learn that the fund was not favored because of its performance but because of paid shelf space.

Aside from mutual funds, investors are getting involved in separately managed accounts, hedge fund-like offerings, even baskets of stocks, such as Folios. Do you see a need for more regulation of such exotic products?

Not necessarily. I think the need for regulation comes in terms of the propriety of the investment for the individual.

In other words, to put an individual with a relatively low income into a hedge fund or any highly speculative investment is a violation of the know-your-customer rule. Investors ultimately must be responsible for their own salvation, and they played a role in their undoing during the runaway bull market.

As far as new products are concerned, I think they represent the breadth and strength of our market. I wouldn't want to place any limitation upon such creativity.

How are you enjoying your fifth, or sixth career?

I love it. I love not having to worry about Congress, or what's in the newspaper the next day. Being able to fish more. Play golf more. Climb mountains.

You've been brutally honest throughout your career. In defending the shareholder, you've strived to be as ethical as possible. How have you managed to be so forthright and be such a success?

Part of it is age. I'm at a time of my life when I can be more reflective than when I was a broker in the trenches.

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