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Consistency Sought in Oversight of Ads

Joel Goldberg is a partner in the New York office of the law firm of Swidler Berlin Shereff Freedman LLP of Washington, D.C. His clients include mutual funds and advisers. Before going into private practice in 1983, Goldberg was director of the division of investment management of the Securities and Exchange Commission. He will be moderating a panel on SEC inspections and enforcement at the Mutual Funds and Investment Management Conference co-sponsored by the Federal Bar Association and the Investment Company Institute this week in Palm Desert, Calif. Goldberg recently discussed the SEC and its enforcement issues and policies with Mutual Fund Market News reporter Andrew Greene. An edited version of their conversation follows.

MFMN: What trends do you see in SEC compliance and enforcement? What issues, in particular, is the SEC watching?

Goldberg: There is a short-term answer and a long-term answer. The short-term answer is they are always looking for the problem du jour and at the moment they are interested in valuation issues. I know another thing they've been looking at, apparently, is performance information where a fund gives performance information to the end of the most recent quarter, but performance has been different since then. But that's the short-term answer, because whatever is hot next month, they'll be looking for then.

MFMN: Do you feel the SEC is going too far in regulating performance advertisements?

Goldberg: Yes. And I think they've taken a very dangerous path. There are a few things wrong with it. It's dangerous because once you tell companies they are at risk if they depart from a consistent practice, then you have chaos. If a company has consistently said, We're always going to use the end of the most recent quarter [in advertisements,]' and sometimes the fund is up and sometimes the fund is down, but [advertising] is done consistently, then you're not putting the fund management in a position where they have to make a judgement. [The SEC] is now saying that consistency won't necessarily save the day. [The SEC] is now suggesting that you have to make a decision at your own peril. The other thing wrong with it is it's completely contrary to the notion that past performance is no guarantee of future results. I think that implicit in the SEC's decision [to focus on this] is that past performance is an indicator of future performance, otherwise I don't know what the problem is, assuming there isn't any fraud.

MFMN: The SEC has announced that it will be offering additional guidance in this area in the form of a legal bulletin and possibly a rule proposal. What would you like to see included in that guidance?

Goldberg: I guess I would like to see some clear statement that would eliminate the chaos that results when you don't know what [the SEC] wants you to do. I almost don't care what they say as long as they say it and it's consistently applied. If they say, If the NAV has gone up more than X percent, or down more than X percent since the most recent quarter, then you have to update,' fine. They just need to make it clear and understandable and consistent, rather than what you now have where [funds] have been consistently following what they understood to be proper procedure and are now told that because of unusual market conditions, they should have to do something else. I think that is unacceptable. I think that the SEC should tell people what they want them to do and almost anything they say will be better than the uncertainty that exists now.

MFMN: And what long-term trends do you see evolving in SEC enforcement?

Goldberg: I think taking the longer view, there is an increasing tendency, which I don't think is a particularly good tendency, to make enforcement cases, or at least enforcement investigations, out of things that in years past would have been handled as regulatory matters. I think there is an increasing tendency, [in situations] where there is no wrong doing, where no one has enriched themselves at the expense of the fund and there may have been some honest mistakes, to have the SEC treat those situations as enforcement cases.

MFMN: And this marks a departure from the way the SEC acted when you were there?