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SEC's Pitt Focuses on Rule Changes


The Securities and Exchange Commission is apparently close to starting a review of fund rules. However many industry observers are unsure which rules might be affected, and how fund marketing might be affected in turn.

The changes follow a promise by SEC Chairman Harvey Pitt at his confirmation hearing in August to review and modernize rules governing funds.

"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," Pitt said at the hearing. Pitt added that many of the SEC's rules are archaic and difficult to understand.

Other Pressing Matters

Of course, other far weightier matters have intervened. So far Pitt has had to deal with the effects of Sept. 11, as well as work through the relocation of the SEC's Northeast Regional Office office, which was destroyed.

Those obstacles may have pushed back the regulations overview, but apparently the SEC will begin with it soon. Earlier this month, Pitt spoke about the regulations review at a private dinner, and later, Paul Roye, director of the SEC's division of investment management, indicated that Pitt had made it clear that he wanted to modernize the rules and that he wanted to do it soon, according to published reports.

No Clear Changes

It seems as though Pitt does not have any specific rules in mind that he wants to modernize,' particularly no specific mutual fund rules, said Mercer Bullard, CEO of Fund Democracy, a mutual fund shareholder advocacy group in Chevy Chase, Md. "I don't know that the chairman has any specific agenda with regard to the mutual fund rules," Bullard said. "He's much more focused on the markets as opposed to funds and I really don't know what he's looking for."

That seems to be the case with many in the industry. There is little idea of what might result from the rule review, according to a spokesman for the Investment Company Institute.

Hints of Change

Still, there is some degree of speculation on the subject. The Commission has had a proposal to revise mutual fund semiannual reports for some time, and that might be one of the first things affected by Pitt's agenda to streamline regulation, Bullard said. The proposal likely includes a revisit to portfolio frequency and fund fee disclosure issues, according to John Collins of the ICI.

Holdings Disclosure

Roye has intimated that the Commission might reduce the number of holdings that a fund is required to disclose, but has been noncommittal on the frequency of disclosure point, Bullard said. The ICI has urged the SEC to reject calls for more frequent disclosure of portfolio holdings and to scale back existing disclosure requirements (See MFMN, 7/17/01).

With regard to fund fees, the ICI expects that one of the results of the proposal 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, Collins said.

"If you ask those in the industry what they want out of this [rule review], many will say they want the affiliated transaction rules relaxed," Bullard said. As it stands, a mutual fund is prohibited from investing in one of its affiliates, which is a company that has 5% or more of its stock owned by one person (or fund), according to the Investment Company Act of 1940. If a mutual fund owns 5% of a company's stock, that company is an affiliate of the fund.

The 1940 Act imposes restrictions on sales between companies and affiliates. For investment firms other than mutual funds, rules relating to affiliated transactions are governed simply by fiduciary responsibility regulations and are much more lax, according to Bullard.

"That has become even more of an issue because the number of mergers between large financial institutions has gone up a great deal recently," said Bullard. "The industry wants those rules liberalized."