Few people know as much about mutual funds as Matthew P. Fink. For more than 40 years, Fink dedicated his career to serving the industry and its 88 million shareholders through his work for the Investment Company Institute, serving as its president from 1991 to 2004.
Now in retirement, Fink has written "The Rise of Mutual Funds: An Insider's View" (Oxford University Press, October 2008), the first comprehensive, historical look at this $11 trillion industry, starting with its inception in 1924 and chronicling its rise and evolution through decades of changing regulations and public interest.
Money Management Executive recently spoke with Fink about his experience of writing the book, his opinions of high and low moments for the industry and some of the people in the mutual fund industry whom he admires.
MME: What are some of the most interesting things that you learned while researching your book?
Fink: I always wondered why the investment company industry supported the enactment of the Investment Company Act of 1940, because if you read the newspapers and magazines at the time, they all uniformly predicted that the industry would oppose the act and, in fact, defeat it. But the industry strongly supported it because of tax reasons.
In 1936, Congress had given mutual funds an exemption from taxes if they met certain conditions, but not for closed-end funds. The Roosevelt Administration and Congress basically told closed-end funds that they would receive tax relief only if they supported regulation of the industry, and the Investment Company Act provided that regulation. So, that's why the closed-end funds, which were the biggest part of the industry in 1940, very much supported the Investment Company Act. That hasn't been reported before.
The second thing I found was why the industry had been so well prepared to deal with Individual Retirement Accounts and 401(k) plans and 403(b) plans, etc. in the 1980s. And the answer was, in the early 1960s, Congress for the first time allowed self-employed individuals to have retirement plans, known as Keogh plans, named after Congressman Eugene James Keogh.
That was the industry's first experience with retirement plans. The industry had to learn how to market retirement plans for doctors and lawyers and architects. Back offices had to learn how to process orders coming from the same firm for a number of people, say two doctors or three nurses, or three attorneys or four secretaries. It was the first time they had to do multiple processing. And industry lawyers had to learn not only the Federal securities laws, but Federal pension laws.
The Keogh experience in the early '60s gave the industry grounding in retirement plans, which paid off in spades, when Congress allowed Individual Retirement Accounts, 401(k) plans and 403(b) plans.
MME: What have been some of the most impactful changes to the industry over the past 80-plus years?
Fink: Well, in the industry's first 50 years, from 1924 until about 1972, it was almost entirely all stock funds sold by broker/dealers. There were very few bond funds or direct-marketed funds. The industry for most of its life was 95% stock funds sold by brokers where they pay a percent front-end sales charge.
The industry underwent a revolution with the development of new types of funds-money market funds, municipal bond funds, international funds, balanced funds, so on and so forth.
The second big change was new ways to distribute fund shares. No-load funds that were miniscule for 50 years sold tremendously well in the '80s and '90s. And then other things happened, like 12b-1 plans and the use of financial planners, bringing forth a multitude of changes in products and distribution channels.
The third major change was in the types of firms offering mutual funds. In the early years, between the advent of the first mutual funds in 1924 until the mid 1960s, almost all fund groups were firms whose only business was being in mutual funds or money management including mutual funds. In the 1960s, the insurance companies entered the mutual fund business. In the 1980s, securities firms and brokerage firms entered the fund business. And in the 1990s, banks entered the mutual fund business.
MME: How has the ICI and the rest of the industry been able to preserve its good name and integrity after the tremendous upset of the mutual fund trading scandal of 2003 and the ensuing three years of fines and settlements?
Fink: First of the all, while the trading scandals were awful, they only involved very few firms in the industry. I think there were about 500 mutual fund companies at the time of the scandals, and my best count at the outside, 19 were involved. The vast majority of firms were not involved.
In fact, after the scandals we learned that a number of those firms had been approached by hedge fund Canary Capital, and firms like Canary Capital, and had turned them down. So, it cannot be underestimated that the vast majority of the industry was not involved in the scandals.
Secondly, the industry did not "pooh-pooh" the scandals, did not try to minimalize them, but instead called for very swift and draconian action by the Securities and Exchange Commission and by enforcement people. The industry was as horrified by the scandals as the general public and the media.
In addition, I think the investment results, while not outstanding, have been decent since then. People did not lose faith that they still get a good deal with mutual funds.
MME: What are some of the lessons that we've learned, and can we prevent similar problems from happening in the future?
Fink: Given human nature, there always will be people who violate if not the law, ethical behavior.
Yet, I think a number of different lessons can be learned. One is the danger of complacency. [Before the scandal], the industry did very well for investors both in economic terms and in fair dealing, and it was a model of integrity. Regulators and legislators would keep pointing to the industry as kind of a model. But I think we became a bit too complacent. It always pays to be skeptical and constantly look for things.
The second problem here was the regulators. Yes, I think Eliot Spitzer was correct; the SEC was not on top of the game as much as we hoped it could have been. They went all over the map on whether funds had a fair value, on whether [market timing at] funds that didn't have fair value may come up, and various ways to fight [market] timers.
The SEC was not the culprit, obviously. It was people in the industry, but the SEC was not as tough as it could have been. This really reinforces the need for a tough, progressive, proactive regulator like the SEC. I'm afraid problems are inevitable in life, but the best way to avoid them is for the industry and the regulators to be awake.
MME: What are your thoughts on the rise and fall of Eliot Spitzer?
Fink: Well, they're kind of mixed. I thought he kind of lucked into the fund scandals. As I remembered it, somebody called, somebody that did not get paid attention to by the SEC called up Eliot Spitzer. All he had to do was find [the misdeeds]. And he was masterful in presenting fairly complicated fact patterns to the public. I give him credit with bringing the scandals to public attention.
On the other hand, I think he went way too far. For example, he went beyond the trading scandals and got into the area of mutual fund fees, where a) I don't think there is a problem, and b) if there is, that's a problem for the SEC to regulate or the market to regulate; it's not to be done by enforcement actions by a single state authority. I think he went overboard.
Having gone so far overboard, that's why his final fall did not surprise me. Well, the way it happened surprised me: the prostitution ring. I had a sense, as a human being, he tended to overreach, so I'm kind of not surprised. On a personal basis, I knew him moderately well, I'm sorry for him and his family on a personal basis.
But to repeat, Spitzer did a lot of good things. He just became excessive, and, therefore, his demise doesn't surprise me.
MME: Who are some of the people in this industry that you admire?
Fink: There are quite a number of them. Some are my contemporaries now, and I would single out four.
Paul Haaga, head of Capital Research and Management, who was the Institute's chairman during the scandals. Three others would be Jack Brennan, founder and former chairman of Vanguard; Jim Riepe, who recently retired as executive vice president from T. Rowe Price last year; and Terry Glenn, who's passed away, and was at Merrill Lynch. The four of them all served as chairmen of the Institute.
They truly were a band of brothers who really pitched in for the industry and shareholders at critical times. Those would be the four people I really have admired of my generation.
When I look back, if I had to single one person out, Ron Lynch, who was head of Lord Abbett in the 1980s and 1990s, was just an outstanding leader of the industry and of Lord Abbett, and just a phenomenal human being. I must have gone to countless meetings with him at SEC, NASD and Congress, and every time we went into a meeting, Ron's thought to me was, "How can we help Senator X, or how can we help Arthur Levitt, or how can we do this?"
Ron was always searching for a way to try and help the other person, and I thought he was just admirable. Looking back at my 40 years, Ron Lynch stands out in my mind.
MME: What of your own accomplishments? What are some of your proudest moments at the ICI?
Fink: One thing was the enactment of legislation in 1996 that ended state regulation of mutual funds. Since the creation of the first funds from 1924 until 1996, any day, any state in the country could adopt any rule it wanted governing mutual funds. And if the fund didn't follow that rule, the fund couldn't sell in that state, and since funds are allowed to sell in all 50 states, the rule of one state became a national law.
And believe me, any given month or year we would have a state come out with a crazy rule, often unwritten, that applied to mutual funds. It was a nightmare we never thought we could get rid of. We tried on an individual state basis. I led an effort in the early 1990s, and we were able to get exemptions for mutual funds from state regulation in about a dozen states.
But then in 1996, we got it enacted as part of federal legislation. That was a tremendous victory for the industry and for shareholders.
More broadly, I guess the thing I'm proudest of was after the scandals, everyone, all the media, predicted that there would be onerous federal legislation of mutual funds in 2004. And we did all we could, I led the effort, to avoid having legislation enacted in that period of panic, and we were able to avoid legislation. I think of anything I'm proudest of, it was getting the industry through the scandals, and toughening up SEC regulations. Getting bad people thrown out of the industry while avoiding draconian federal legislation.
MME: How would you like to be remembered?
Fink: As an effective advocate for the fund industry and its shareholders.
MME: You're a great storyteller. Can you tell some of your most memorable, funny moments?
Fink: One I remember, for some reason I guess because I've sat in so many dull board meetings both at the Institute and other organizations. I remember a board meeting in the early 1970s at the Institute that really was dramatic and could have been a Hollywood movie.
There was currently a debate about a particular variable life insurance product that would have to register with the SEC under the securities laws of the Investment Company Act. Normally, the SEC exempted variable life insurance from the securities laws, so the Institute's board was debating whether the ICI should appeal the SEC's decision or bring a lawsuit, or try to overturn it so it could be regulated.
A tough, young, kind of good-looking executive of an insurance company that had funds said at the ICI board meeting that if the Institute pursued the matter of trying to get variable life insurance regulated, his group and other insurance groups would leave the Institute, quit the Institute. So, it was kind of a threat, and he was kind of a tough guy. I'd say Robert Mitchum is the guy who I would cast him as.
And a board member who had never said anything at all the board meetings I'd been at, the hundreds of board meetings I'd been at, named Justin Dunn from Axe Houghton Management. This old man who had never said very much, I guess I'd have Spencer Tracy play his part.
And he said, "You know, Mr. Smith, I knew Franklin Roosevelt and I hated Franklin Roosevelt. I hated the entire New Deal. I would not wish an application of the Investment Company Act on my worst enemy. But when someone makes a threat like you did, and holds a gun to my head, I have only one answer: There's the door, leave!"
MME: So, did anything happen?
Fink: It was all a bluff. The ICI proceeded to petition or sue the SEC. Variable life insurance had to register with the SEC as investment companies and securities. And the insurance companies did not quit the industry, despite that unusual boardroom blustering.
Jim Riepe, Former Vice Chair, T. Rowe Price, On Matthew P. Fink
"Matthew Fink has always been the historian of the mutual fund industry," said Jim Riepe, the former vice chairman of T. Rowe Price, who has worked with the former president of the Investment Company Institute for decades and was ICI board chairman when Fink was named president.
"When we all got in the business, this was a tiny, cottage industry," Riepe recently told MME. "It has changed very dramatically. Now mutual funds are bigger than banks. Matt was one of the reasons Paul [Haaga], Jack [Brennan] and I have been in the business for so long."
Riepe said there are many regulations that people in the industry take for granted and don't know why they were adopted in the first place. "Matt has a tremendous, encyclopedic knowledge of the industry, and the role he played in the industry was very important, serving as the educator of people," Riepe said. Through Fink's efforts, the ICI played an important role in Congress in educating people about the sometimes arcane issues in the mutual fund business, he said.
Riepe said Fink's book is thoughtful and well-researched, and said that Fink checked a lot of facts with him.
"The chapters I've seen are accurate and interesting to those in the business," he said. "As in his day job, his diligence was amazing. The average reader may find it to be a little dry, but anybody in the financial business will be interested to read about the background." -J.M.
Jack Brennan, Chairman of Vanguard, On Matthew P. Fink
For more than 25 years, Vanguard Chairman Jack Brennan has known and worked with Matthew P. Fink, the former president of the Investment Company Institute and author of "The Rise of Mutual Funds: An Insider's View."
"Nobody from our business is more passionate than Matt about the business itself," Brennan recently told MME.
"Matt viewed himself as a member of the industry, not just the head of an industry association. I have an immense admiration for his knowledge of the industry and its history," Brennan said.
"During his 13 years as president, Fink was on the job 24/7 and wouldn't hesitate to pick up the phone at 6 a.m. on a Saturday to discuss critical issues with the current ICI chairman," Brennan said.
"That's what you want from someone who is your eyes and ears in Washington, D.C.," he said.
Brennan noted that Fink, who is a graduate of Harvard Law School, could have done something different with his career, but altruistically chose to dedicate it to the fund industry and its 88 million shareholders.
"Matt was an active participant in the rise of the U.S. mutual fund industry from a cottage industry to a global force," Brennan said.
"His historical perspectives and real-time commentary make this book a must-read for people interested in the past, present and future of this vital industry," he added.
"We're buying copies for our people here," he added. "When somebody else writes a book about the mutual fund industry, Matt will be in it." -J.M.
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