Compliance

The mutual fund industry's chief lobby group has sent a letter to a committee of the New York Stock Exchange suggesting that shareholders should have a say in the authorization of stock option plans for workers.

WASHINGTON - In a speech that some thought signaled a get-tough attitude toward the mutual fund industry, Securities and Exchange Commission Chairman Harvey Pitt told executives late last month that the SEC would review distribution fees for mutual funds.

WASHINGTON - Kicking off the 2002 General Membership Meeting of the Investment Company Institute on the heels of recent scandals that have rocked the investment management and accounting industries, ICI President Matthew Fink told fund executives that the mutual fund industry was working hard to protect the interests of shareholders.

The Securities and Exchange Commission may soon change fund performance advertising rules to ensure that investors are better informed about the most recent performance data available.

It doesn't happen very often. But when independent directors who sit on mutual fund boards become the focus of criminal allegations, lawsuits, investigations by the Securities and Exchange Commission or public scrutiny, fund companies and their boards of directors often find they must make an important decision. Should they ask the trustee to resign or stay the course?

Just weeks after Merrill Lynch of New York settled a case with the State of New York to improve its disclosure of business dealings with the companies it analyzes, the New York investment and banking firm faces a smattering of lawsuits.

Mutual funds that are used specifically as investments of variable annuities will now follow disclosure rules more in line with the rest of the fund world.

ORLANDO - Be prepared to get to know your Securities and Exchange Commission compliance officers better. The SEC plans on making longer and, perhaps, more frequent compliance examinations.

Timing is everything.

The U.S. Department of Justice's felony indictment of March 14, which charged Arthur Andersen with obstruction of justice in the federal investigation of Enron, may be causing fund advisers and their boards of directors to take pause and more carefully consider the auditing process for their funds. That is true even where fund groups have never utilized Andersen to audit their funds.

The troubles at Big Five accounting firm Arthur Andersen of Chicago over its auditing of the financial statements of Enron Corp. may be raising issues for the mutual fund industry.

Arthur Andersen's recent troubles in the wake of Enron's financial meltdown and its uncertain future have begun wafting over to the fund industry.

This is not the first time the fund industry has faced challenges with independent auditors.

With the recent issuance of Internal Revenue Service and U.S. Treasury Department guidance on capitalization, a drawn out conflict with the fund industry over the tax treatment of fund start-up costs appears to be drawing to a close. The Investment Company Institute has not issued an official comment on the issue, but it has indicated that the new rules do not go far enough in terms of the costs that can be expensed.

The financial implosion of Enron late last year has brought increased scrutiny to the regulations that govern 401(k) plans. Now, some say the longstanding issue of portfolio disclosure might be next.

As lawmakers debate possible reforms to 401(k) rules in the wake of Enron's financial collapse, Ted Benna, who launched the first 401(k) more than two decades ago, has suggested that workers be barred from spending their own money on stock in their companies.

The Securities and Exchange Commission's comment period on actively managed exchange-traded funds ended last week, but the new type of ETFs that will likely soon be approved by the Commission are those based on fixed-income indices.

Looking ahead to 2002 there are several issues both with mutual fund regulation and proposed legislation that will likely reach some conclusion this year. Late last year, the Securities and Exchange Commission sent out a letter seeking comment on the development of actively managed exchange-traded funds. Those comments are due in January 2002, and Alan Rosenblat, an attorney with Philadelphia-based law firm Dechert, expects that the SEC will release guidelines about that over the course of this year.

This past year was particularly active in terms of mutual fund regulation, according to industry lawyers. A number of initiatives from the Securities and Exchange Commission that had been discussed in recent years, including independent fund director and after-tax reporting issues, came to fruition in 2001.

NASD Regulation continues to monitor sales of variable annuities and fine dealers who violate suitability rules and record-keeping requirements. Two firms were named in the most recent enforcement action and more actions are possible, industry experts say.