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Execs Grapple With SEC Anti-Fraud Regs Who Should Give Final Sign-Off Remains Unanswered Question


PALM DESERT, Calif. - There's no question that the Securities and Exchange Commission has left the mutual fund industry a little confused lately.

With the passage of anti-fraud legislation last summer and the SEC's recent interpretation of that bill to require top fund executives to sign off on shareholder reports, the industry seems to have more questions than answers about how to implement the new rules.

In fact, fund officials have balked at the act's provisions.

The Investment Company Institute wondered publicly this summer whether Congress had intended fund executives to certify that shareholder reports are accurate, and many fund officials have said certification would take up too much of a top executives' time [see MFMN 9/23/02].

But, judging from discussions late last month at the Investment Company Institute's Tax & Accounting Conference here, the industry has apparently accepted that the requirements are here to stay. And a general, if sketchy, plan for following the new rules has begun to take shape.

"At first there was a great deal of frustration," Joseph Carrier, chair of the ICI's Accounting and Treasuries Committee, told executives in a panel discussion. But the consensus now is: "This is the new world order. Deal with it," Carrier said.

Industry Buzz

There was almost an incessant buzz at the conference about how the SEC's requirements, based on the Sarbanes-Oxley legislation stemming from corporate scandals at Enron et al, will affect funds.

Barry Miller, associate director of the SEC's Division of Investment Management, said that the Sarbanes-Oxley Act requires that CEOs and CFOs certify that they have reviewed financial reports that will be issued to shareholders, and that, to the best of their knowledge, those filings contain no inaccuracies. In addition, the act requires fund companies to document their disclosure process, which is subject to review by the SEC.

It's a tall order, especially for large complexes, which issue throngs of documents for scores of funds. Carrier, who is also the VP and treasurer at T. Rowe Price Funds of Baltimore, said that in a complex of 100 funds, certifying each fund's annual and semi-annual reports, with five hours of work per report, would require 1,000 man hours each year.

"This is obviously very difficult for one or two people to do," said Richard Thomas, another panel member, who serves as senior VP and treasurer at Federated Services Company, of Pittsburgh.

Already, fund complexes are wondering how to streamline certifications, but executives are getting little guidance. "It's up to us to figure out the procedures that we need to follow," Thomas said. "There's no correct way to do this."

Indeed, the SEC has few hard-and-fast rules on the subject. Executives said that the commission will likely compare a fund complex's scheme for complying with Sarbanes-Oxley to what other fund companies are doing, thus checking a firm's process against a consensus in the industry.

Although the act states that top management should sign off on semi-annual and annual reports, executives are asking who could technically serve as a fund's CEO, both from a legal and operational standpoint. Carrier said it is clear that a signer should not be "an appointee down in the accounting department." Brian Bullard, chief accountant for the SEC's Division of Investment Management, said, "If you're the main treasurer, you're signing."

Others, meanwhile, said that the best person to sign off would be the officer who files a fund's registration statements with the SEC.

Thomas said that some firms are thinking about adopting a new executive position whose sole responsibility would be to certify shareholder reports. Others are talking about forming committees of tax and accounting staff who would meet with top fund executives once a month to handle the certification process.

At one point, the advice became vague enough that Carrier told executives to ask themselves, "Does it feel like it's the CEO?"

Whatever the final decision, panelists advised firms to involve their boards in the process. "Think about your board's role in choosing the CEO," Carrier said. "This will not be chosen unilaterally."

Executives also raised concern about the role of service companies in the process of certifying the reports. In some cases, Carrier said, service agents sign off on a fund's initial registration documents. Should executives at those firms sign shareholder reports? While there was no clear conclusion, Carrier advised executives to examine their contracts with service companies and make certain which firm is liable for mistakes in disclosure forms.

Carrier reminded executives that Congress' intent was to "get the top folks at the complex to sign off." Period. Carrier added that he personally didn't "want to start singing a lot of glory-glory-hallelujah" about the new rules, "hopefully [complying with Sarbanes-Oxley] has some value to the organization, and you can get something out of this process, some kind of strategic value."

"We're not going to have the right answer right out of the gate," Carrier said. "It will evolve."