March 27, 2000
Marianne K. Smythe, a partner in the law firm of Wilmer, Cutler & Pickering of Washington, is chairperson of the Mutual Funds and Investment Management Conference sponsored by the Investment Company Institute and Federal Bar Association being held this week in Palm Desert, Calif. Smythe is a former director and associate director of the SEC's division of investment management. She recently spoke with Mutual Fund Market News reporter Mike Garrity. An edited account of their conversation follows.
MFMN: Do you think the SEC is going too far by subjecting the tone of fund ads to scrutiny?
Smythe: I think it's a tough balancing act. The SEC knows well that the First Amendment and the concept of commerce allow advertisers substantial rein in how they present their advertisements. On the other hand, the law is pretty clear that most advertisements fall under regulatory oversight.
The SEC is right to be concerned when mutual funds start to be hawked like the latest rock music fad. Have they gone too far? I don't think they've gone too far yet at all. But I think they have to be careful about how far they do go.
MFMN: Does the SEC need to provide more guidance on how far funds can go in advertising?
Smythe: I suspect the SEC is doing a lot of jawboning. When I was there, there were a series of ads by one company that shall remain nameless that I thought were just outrageous. The way I dealt with that was to call the company and say, Cut it out. We don't want to test this in the courts. But, if you keep it up, we will.' And they toned down their ads considerably. I suspect that's some of what's going on.
The real worry here is that to the extent that the ads these days tout spectacular performance over the last two or three years, they almost seem to imply that this is what you can expect, even though there is eight point type that says past performance is no guarantee of future returns. I think the SEC is absolutely right to be reminding folks that they don't want to create a whole bunch of investors who have expectations that can't be met.
MFMN: The danger of that being that when the market drops, you've got a big redemption problem and potentially suitability arbitrations?
Smythe: My view is that the danger is that you hurt people. It's not so much whether they'll sue or turn against the market. The mutual fund industry has been so responsible for so long in adding value, it really doesn't need to be taking the risk of hurting people or encouraging the raising of expectations in a way that could be harmful to the investors.
MFMN: Is there a zone in which it is safe to advertise?
Smythe: The SEC allows a lot of free rein in advertising. It's not a question of whether there's a zone. There's something as wide as a football field.
This is not a universal problem. You look in the newspapers, most of the ads are just fine. But occasionally somebody wants to try to gain more attention just the way kids do in a playground by running outside of the playground saying, Catch me.' Well, I hope they get caught.
MFMN: If the fund governance proposals for directors are adopted largely as is, do you see them having much practical effect on funds and how they operate?
Smythe: I don't know that the proposals will be adopted as proposed because I think the SEC has gotten a lot of comment about the complex tradeoff between requiring more disclosure and junking up the prospectus again, disclosure that in some respects seems maybe not all that helpful in enabling an investor to make an intelligent decision about his fund.
I think it's very important for the SEC to keep doing what it does so well and has done so well over the last five or six years. That is to be on the bully pulpit reminding fund management, reminding fund boards, that the directors are the directors of a stand-alone corporate entity that has its own investors.
They're not directors of the investment adviser and their role is not to be a cheerleader for the investment adviser. They don't have to be adversarial or nasty but they have to be independent.
I think that the SEC's proposals are really an attempt to encourage that kind of independence. Whether the proposals themselves are necessary, I think the [Report of the Advisory Group on the Best Practices of Fund Directors which the Investment Company Institute adopted last year] went about as far as one needed to go.