Harvey Pitt has not even been formally sworn in as chairman of the Securities and Exchange Commission, yet already some industry observers are concerned that mutual funds may take a back seat once he takes the wheel.
The Senate confirmed Pitt's nomination late last month and he is expected to be sworn into office soon, replacing acting chairman Laura Unger, who had stepped up following Arthur Levitt's resignation as chairman in February.
It will mark a return to the SEC for Pitt who held a variety of positions there in the '70s, lastly as general counsel.
In recent years Pitt's been a well-known attorney representing many prominent clients including the Investment Company Institute and the New York Stock Exchange and just recently left his post as chairman of the Washington, D.C. office of the New York-based law firm Fried, Frank, Harris, Shriver & Jacobson.
However, it is not his experience being questioned, but rather his likelihood of giving mutual fund issues as much attention as they deserve. In his hearing in front of the Senate Banking Committee, Pitt spoke about some general intentions but did not address mutual funds.
"Pitt clearly laid out some areas that are on his priority list in the hearings, but the phrase mutual fund' was never uttered once in three hours," said Mercer Bullard, president of Fund Democracy, a shareholder advocacy group. While Pitt has some experience with funds, the bulk of his experience lies in corporate finance. As a result, he will have to rely more heavily on the division of investment management than he will with other divisions, Bullard said.
Who's Interests?
Some have suggested that the new chairman will represent the interest of the fund companies more than shareholders. That is extremely unlikely, according to Barry Barbash, a partner with Shearman & Sterling and former director of the SEC's division of investment management. "Harvey is a lawyer's lawyer, and a lawyer's lawyer knows who his client is," said Barbash. "His client has just switched from being the Investment Company Institute and people on the other side to the American public. He is going to represent the American public, in the position of SEC chairman, to the utmost."
While not everybody shares the view that Pitt will ignore mutual funds, some think that his priorities may simply lie elsewhere based on necessity. For example, there's always some fund regulation that needs attention, but if the new chairman's main priority is outright fraud, then stocks are likely to get the bulk of the attention and mutual funds may be set aside, said Russ Kinnel, an analyst at Morningstar.
"I don't think the chairman will necessarily be personally involved in making decisions in the regulatory matters concerning mutual funds," said John Collins, a spokesperson for the ICI. "He's going to be in charge, but so much of the spade work is done by the SEC staff and then reporting to Paul Roye, the SEC's director of the division of investment management at the SEC. It's hard to tell exactly how much involvement he'll have."
However, that is not altogether different from how things have worked at the SEC in recent years, Barbash said. In fact, Pitt may have more involvement in policy changes than others have had recently. "I think under Harvey you will see the Commission run in a more traditional way, where the commissioners will be more involved in the bigger picture determinations," he said. Levitt tended to view his division directors as heads of business units, who made recommendations designed to fulfill what his goals were.
Still, even if Pitt is more aggressive in proposing initiatives, it does not mean that those initiatives will be mutual fund related. "I'd like to see mutual funds play a much more important role in the chairman's office than they have," said Bullard. "It continues to be frustrating that both Congress and the SEC relegate the most important financial product to the back pages of the chairman's priority list."
The first mutual-fund-specific issue that Pitt will likely face is a proposal to revise rules concerning semi-annual and annual reports, which includes the discussion of portfolio and fund fee disclosure issues, according to Collins. The ICI expects that one of the results of that revision will be that companies will be required to outline fund fees, not only in percentages, but in actual dollar values given a certain invested amount. In fact, according to Bullard, Roye already has those proposals on the new chairman's desk. The question is when Pitt will be able to get to it, Bullard said.
One of the broader initiatives that Pitt outlined at the confirmation hearing, while it doesn't pertain to mutual funds specifically, could have an enormous impact on fund companies. Pitt wants to examine the SEC rules and revise them where they are arcane or unclear.
"I would like the SEC to lead a review of the requirements it administers, and the regulations it imposes, to be certain they are sound, reasonable, cost-effective and promote competition," said Pitt at the hearing.
Some have suggested that revisiting the regulations to provide clarity is good news for fund companies. However there are significant potential drawbacks to fund companies as well, Barbash said. "On one hand, clarity helps companies know what they can and can't do, but it also puts the SEC in a position where it can enforce the rules with much more reckless abandon because everyone knows what they are."
Some would argue that clarity means fund groups will be able to take advantage of the rules. But it will also be the case that the SEC will not have to be in a position to accept defenses of misunderstanding, Barbash said. "So as you break the rules, there's a much stronger case for harsher punishment."
