Even with the recent scandal unfolding in the fund industry, the Mutual Fund Integrity and Fee Transparency Act of 2003 is heading for its twilight rather than the limelight, industry observers said.
Even so, the fund industry is likely to see additional changes as a result of the investigation kicked off by New York's gun-slinging Attorney General Eliot Spitzer. While integrity, or lack thereof, may be at the heart of the scandal, the proposed legislation by Rep. Richard Baker (R-La.) does not specifically address market timing. Instead, industry watchers expect new regulations to come down the pike that will have more of a direct correlation to this and other abuses detailed in Spitzer's complaint.
The Securities and Exchange Commission has publicly stated that it will consider making changes in the industry due to these abuses and will put out proposals for public comment in the near future. Remedies the commission is considering include requiring funds to have a market timing policy that is disclosed to investors, emphasizing fair-value pricing, or possibly requiring all sales and orders to adhere to a strict 4:00 p.m. deadline.
Former undersecretary of the U.S. Treasury Gary Gensler said Baker and Rep. Michael Oxley (R-Ohio) have been looking to the SEC to pick up where the Baker bill left off. "Baker's bill had been watered down to get it out of committee," Gensler said. "Unfortunately, there are many members on the Hill who didn't understand the need for such legislation." Baker's office did not return calls seeking comment by press time.
However, Gensler is not sold on the SEC's commitment to meaningful reform. The scandal "raises the chance of some new regulations, but from what we've seen so far from the SEC, it does not appear they are willing to lead the charge for reform. SEC Commissioner William Donaldson has put out some things, but they are modest additional disclosures."
Neil Lang, an attorney with Sutherland Asbill & Brennan, and former chief trial attorney for the division of enforcement at the SEC, said that it is likely regulators will issue a clarification on market timing. "Regulators haven't been exactly precise in their analysis of this issue. I would venture to say there is not a lot of guidance out there for anybody with respect to market timing, certainly not from the SEC," he said.
Market timing, while not illegal, is often detrimental to long-term shareholders. At issue in the scandal is whether funds that stated in their prospectuses they prohibit or discourage timing, then allowed it for their own financial gain. What classifies timing? While it is obvious in extreme cases, many in the industry are unsure of the exact parameters.
Kathryn Barland, a senior analyst with Lipper and former employee of both the SEC and the NASD, said she is pretty certain that more stringent disclosure requirements for market timing are on their way.
While the microscope is on mutual funds, it seems a logical time for Baker to try to reignite the push for his bill. The Mutual Fund Integrity and Fee Transparency Act of 2003, also nicknamed the Baker Bill, was proposed in June.
It recommended that mutual fund companies provide individualized statements to investors, detailing, in exact dollar amounts, the fees charged. Recordkeeping of soft-dollar transactions was also included in the proposal, as well as maintaining an independent chairman for a fund's board of directors. However, the version that passed through the House Financial Services Committee was drastically thinned out, with the Investment Company Institute successfully lobbying for a standardized expense statement, based on a $10,000 investment, as well as a provision allowing for an independent chairman, but not requiring one.
Fink's Last Hurrah'
"I think shooting down the Baker bill will go down as the last hurrah of the Matt Fink era of the ICI," said Don Phillips, Morningstar's managing director. "As an investor, it was so dismaying to see the industry successfully shoot down what was a well-intended bill that addressed serious issues. It's not just a handful of critics pointing out these issues," he said.
"The fund industry was very successful in shooting down most of the major provisions of the Baker bill. [But] the industry's ability to wage those kind of wars - to continue to tell the public that they don't need more info and that the industry is already well regulated enough" is fast coming to an end, he said. "So, you might actually get some meaningful reform in the industry."
Spitzer to Gain More Steam
Attorney Lang isn't so sure the scandal will resuscitate the Baker bill, but he does think Spitzer's investigation will bring mutual fund governance into greater focus. "I think it's going to force a reexamination of the policies and practices of the industry [and] a lot of introspection, so that mutual fund directors [will] come to grips with the issues that are affecting the industry. Scrutiny draws a lot of unintended consequences of looking at something. You find out things that are right with the industry, and then you find out some of the things that are wrong with the industry," Lang said.
However, just because the spotlight is shining squarely on mutual funds doesn't mean change is coming, according to others. Mercer Bullard, shareholder activist and former assistant chief counsel at the SEC, said that the Baker bill isn't likely to get renewed life just because of the scandal. The proposal does not have a sponsor in the upper house of Congress, he noted. "The Senate has essentially continued to be asleep at the switch in recognizing the need for fund regulatory reform," Bullard said.
"At this point, there's no indication there's going to be any meaningful change," he said. "For example, the SEC has not come out and squarely stated that using stale prices is illegal. I think that is a critical step. If they don't do that, this fraud will reoccur over time. If the SEC does not state and enforce what the law is, fund firms will not obey the laws and requirements."
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