ICI President Paul Schott Stevens said last week that his agency is firmly behind reform in the industry and called on the SEC to "administer strong medicine to prevent trading abuses in the future."

Stevens did not limit his comments to mutual funds, however, calling for regulators to include intermediaries and hedge funds in the reform process. He argued that without cleaning up all the weak links in the chain, the problems won't be solved.

"We all recognize that first and foremost, this is a mutual fund scandal," he said. "But the scandal is not limited to mutual funds. Enforcement actions and regulatory reforms at the SEC are addressing mutual fund issues comprehensively and forcefully, but the record developed since last September makes it clear that more is needed if we are to successfully prevent future abuses."

In his first public address as president of the Investment Company Institute, Stevens said, "Make no mistake. The Institute supports this reform process." He took over the job from Matt Fink, who retired on June 1. Stevens told the gathering at a National Press Club luncheon in Washington that the ICI has endorsed the vast majority of proposals the SEC has developed, including in the areas of fund governance, disclosure practices and compliance programs.

However, he also warned of overzealous regulation, particularly in the area of transparency. "We always need to remind ourselves that requiring the disclosure of more information to investors does not assure greater understanding or insight."

And it is important to keep in mind who will have to pay the piper at the end of the day, he said. "Since 1998, there has been a raft of regulations," Stevens said. "They are not costless. It is the ultimate investor who will bear those costs. Unfortunately, this is an area where there is no free lunch."

Last year, the SEC reported it had adopted 40 new rules affecting mutual funds since 1998, Stevens said. However, since the scandal broke, new regulations have been coming at an even more rapid pace. Since September, the Commission has proposed or adopted 16 new regulatory initiatives, 12 of which are in direct response to the fund malfeasance unearthed in the past nine months.

"The record of its recent investigations amply demonstrates that the SEC has the authority it needs and is wielding it aggressively, just as it should," he said. However, Stevens said he doesn't think mutual funds should bear the brunt of the SEC's enforcement and regulatory power alone. Stevens pointed out intermediaries and their responsibilities, including banks, brokers, financial advisers, insurance companies and retirement plan administrators. He said that those companies have an obligation to abide by the law, specifically relating to late trading, and to implement a fund's policies, such as those designed to keep out market timers. In many cases, fund firms do not have any access to information about the ultimate end investor, and therefore are hindered in their ability to enforce short-term trading policies.

Stealth and Deceit'

Stevens also took his shots at hedge funds, saying that it would be ironic if a host of new regulations are imposed on the mutual fund industry as a direct result of the scandal, but hedge fund advisors could go about business as usual.

Regulators need to take a deeper examination of hedge funds' role in Fundgate, Stevens said. Market timing may not be illegal when it is done in an open, aboveboard way. "As practiced by some hedge fund advisors, however, market timing was often done by stealth and deceit, in ways designed to frustrate the ability of mutual funds to detect and prevent it," he said. Many timing practitioners conduct themselves in an unscrupulous manner, often corrupting others, prevailing on a broker, insurance company, non-fund advisor, or another financial institution to help cover up or mask the timing activity, he said.

These "highly deliberate and predatory" practices were "designed to pick the pockets of long-term mutual fund investors," according to Stevens. The acts were committed, largely, by hedge fund advisors not registered with the SEC, he said. Noting that the majority of unregistered hedge funds are dead set against even a modicum of regulation because they claim registration and oversight would "screw up their business model," Stevens said he was hard pressed to understand how an ethically run business would object to such basic oversight.

Furthermore, Stevens expressed concern that an unfair balance of regulatory actions focused on the mutual fund industry might give other products an unfair advantage. "If the disparities in our scheme of regulation become too stark--with mutual funds regulated so comprehensively and competing investment vehicles not at all--it will simply invite sharp operators to go where they can escape scrutiny and maximize profits."

Stevens told the attendees that the scandal does not represent a rotting of morals throughout the mutual fund industry, but nonetheless, a reemphasis on fiduciary duty is needed. "The reason we regard the recent abuses to be so outrageous is precisely because we had come to expect better from mutual funds, and because the abuses depart so radically from the duties we know mutual funds owe to their investors."

Echoing sentiments expressed by his predecessor Fink and ICI Chairman Paul Haaga, Stevens emphasized the basic values of a fiduciary and the importance of getting back to the basics. "Mutual fund investing is a proposition that appeals to so many because it is predicated on this fundamental notion of fairness," he explained.

Stressing the importance of accountability, the "mutual" character of mutual funds, accessible information that is both reliable and thorough, and trust, Stevens said that faith in the product is paramount to the future success of the industry.

"[The road ahead] will demand that we be unflinchingly loyal to the interests of the investors whom we serve, and deeply conscious of the obligations we assume as fiduciaries on their behalf," he said.

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