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Pitt Resignation Obscures Issues At ICI Confab

As attendees at the Investment Company Institute's Securities Law Developments Conference sit down in Washington today to discuss key regulatory issues facing the fund business, some are wondering whether they will be wasting their breath.

That's because, with the resignation last month of Securities and Exchange Commission Chairman Harvey Pitt, no one can be sure that the current regulatory agenda set forth by the SEC will continue unaltered. In fact, some think that a handful of key regulatory proposals facing the fund business may be tabled.

"Inevitably, whenever a chairman leaves, there's got to be some things up in the air," said Deborah Gatzek, chief counsel at ING Americas, who is scheduled to speak on a panel today about no-action positions from the SEC.

Forward or Backward Motion?

"In each situation where there has been an initiative, the question will be asked of the panel member, Is there still forward motion?'"

To be sure, there is plenty to talk about. This year's agenda includes discussion of some of the most contentious issues in the fund business: the SEC's bid to force fund companies to disclose proxies (see related story, page one); the disclosure of portfolio holdings, anti-money laundering provisions, and the infamous Sarbanes-Oxley Act, the anti-corporate fraud legislation that many say was intended to regulate operating companies, but was wrongly inflicted upon the fund industry.

The ICI, meanwhile, declined to comment on the conference, which has been closed to the press, or what will be discussed there.

The big question, of course, is which of these initiatives will survive the transition of power at the SEC..

Scheduled speakers and conference participants said they expect SEC staffers to be tight-lipped. "What the staff is going to say is, basically until there is a replacement, their instructions are to just forge ahead," said Rose DiMartino, a partner at the law firm Willkie Farr & Gallagher.

"There is some hope that the proxy disclosure proposal will be withdrawn," DiMartino added. She said this marks the third time that the SEC has proposed the proxy disclosure initiative. Yet, before Pitt resigned, "everyone had the impression that the ship had sailed on that one and nothing could be done," she said.

"It's one of the biggest, most controversial issues that's going to be talked about on the first day," DiMartino said.

"When people buy a mutual fund, they buy collective management," she said, adding that the proposal "opens the door for every interest group to be picketing in front of your place if you don't vote the way they want you to vote." Last week, in fact, AFL-CIO members picketed Fidelity outlets throughout the country on this very issue (MFMN 12/2/02)

Hedge Fund Hotline

On another issue, the SEC conducted a fact-finding investigation of the hedge fund business in past months to determine if the industry needs regulation. "This was an initiative that was pushed by Harvey Pitt, so I think there will be a slowdown in that one," said DiMartino. "Our clients are just waiting and seeing."

No matter who replaces Pitt at the SEC, the Sarbanes-Oxley Act, spawned by corporate scandals at Enron, WorldCom and elsewhere, is here to stay. Still, many in the fund business wish the legislation, which requires fund CEOs to sign off on hundreds of shareholder reports each year, would just go away.

At the ICI's tax and accounting conference in Palm Desert, Calif., in September (MFMN 9/30/02), executives bemoaned the amount of make-work that the act generated for the fund business, not to mention what they claim to be its ambiguity. Gatzek said that executives will likely echo the complaint at today's conference.

Aside from the hundreds of shareholder reports that many top executives will have to personally certify (MFMN 9/23/02), the act also requires fund companies to disclose exactly how they go about ensuring that those reports are accurate.

The provision of the legislation is known as "disclosure controls," and comes in the wake of recent corporate scandals where executives have been accused of disclosing inaccurate information to investors.

Discussion at the ICI September meet showed how determined executives were to comply with the law, and how confused the new legislation had left them. This month, observers said that little has changed. Still, Gatzek said that "some of us hope that over the next year, calmer heads will prevail and we can go back to the SEC or Congress and say, Does this really make sense?'"

Indeed, fund executives at September's Tax & Accounting conference weren't exactly sure what "disclosure controls" means. They knew that the SEC plans to make sure that fund companies have complied with the requirement. But they weren't sure exactly how.

"We need to figure out what that means," said Joseph Carrier, chair of the ICI's Accounting and Treasuries Committee, during the ICI's September conference.

The SEC hasn't been much help in clarifying the issue. "It isn't a one-size-fits-all, but [regulators are] going to want see whatever documents you have," said Barry Miller, associate director of the SEC's Division of Investment Management.

Still, executives who spoke at the September conference appeared to have began forming an idea of how they would satisfy the SEC's new disclosure control requirements.

The basic questions fund companies should be asking in forming a disclosure process should be "Where [do] you get your information and how do you know that it's right?" said Brian Bullard, chief accountant at the SEC's Division of Investment Management.