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Industry Wary of Having Top Brass Sign Off on SEC Filings

The mutual fund industry is balking at a proposed new Securities and Exchange Commission rule that would require top executives to personally sign off on each of their funds' annual and semi-annual reports.

The ruling interprets the anti-corporate fraud legislation that was signed by President Bush last summer to apply to mutual funds. Industry officials say that the law was not designed with funds in mind. Rather, they say, lawmakers sought to prevent accounting scandals at operating companies, such as Enron, Tyco and WorldCom, just a few of the firms that have been accused of misleading investors.

While many say they agree with the spirit of the requirement, which aims to provide shareholders with trustworthy information about their investments, they also say the SEC is forcing funds into a cumbersome and difficult process that could involve considerable time and expense.

"It is going to be a hassle to implement," said Richard Grueter, a partner in the investment management group at PriceWaterhouseCoopers of New York.

During an Aug. 27 open meeting, the commission decided that the new anti-corporate fraud legislation, known as the Sarbanes-Oxley Act, means that executives and financial officers at fund companies must personally verify that each of their funds' shareholder reports are accurate. In addition, fund companies will have to disclose their methods for certifying the reports.

Executives have until Oct. 16 to comment on the proposed rule amendment. The Investment Company Institute, meanwhile, has issued a letter to the SEC questioning whether the Sarbanes-Oxley Act should apply to funds [see MFMN 9/9/02].

Grueter and others close to the issue said that fund CEOs and CFOs at large complexes will have to personally review and sign their names to hundreds of reports, two for every fund a company offers. The CEO of a firm that offers 90 funds would have to sign off on 180 reports each year, for example: both the annual and semi-annual statements for each of the firm's funds.

Off the Charts'

"The numbers, when it comes to funds, are just off the charts," said Barry Barbash, a former director of investment management at the SEC and now an attorney with New York-based Shearman & Sterling. "That's far in excess of the corporate world."

In addition, complexes that employ sub-advisors face the prospect of gathering scads of information from scores of executives.

Thomas Smith, Jr., an attorney specializing in mutual funds with the New York law firm Sidley Austin Brown and Wood, said that some of the information included in a shareholder report doesn't need verification by a CEO, particularly "subjective" interviews with portfolio managers and other investment commentary. Faced with the prospect of having to sign off on each document, CEOs might curb those materials, and investors would lose out in the long run, he said.

"The better approach [might] be to require the certification of the financial statements," Smith said.

Fund consultant Geoffrey Bobroff, of East Greenwich, R.I., said that CEOs will likely have to call meetings with each of their funds' key staff, including portfolio managers and sub-advisers, to ensure they have all the information they need.

Gathering all of that information makes it "more awkward for an officer of the fund to be signing reports where he may not have the ability to know everything that is required to sign off," Bobroff said. To be sure, he said, many think fund executives should know all of that information and be able to verify a report's accuracy. But in many cases, fund managers have employed derivatives or other complex transactions arduous to sort through.

Others wonder whether expecting a CEO to figure all of that out is even feasible. "When you're talking about hundreds of funds, you do have to ask yourself how realistic is it for the CEO and CFO to know all the details of each annual and semi-annual report," said an attorney at a prominent fund complex, who asked to remain anonymous. "A rubber stamp will not do. Is that the most productive use of a CEO's time?"

A Fund CEO?

To mitigate the problem, the attorney said that some fund complexes are even considering appointing a CEO for each of their funds, which would allow one person who is in a position to know the details of a fund's activity, to certify that the product's reports are accurate.

"Isn't it enough," the source continued, "to have the people who do the legwork certify to you that they've done their job?"