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SEC Honchos to Trustees

WASHINGTON - Four former chairmen of the Securities and Exchange Commission said last week that directors of mutual fund boards need to do a far better job of monitoring the funds they oversee and prevent the kind of fraud that has run rampant on Wall Street the past year.

Harold Williams, who oversaw the SEC from 1977 to 1981, said that fund directors need to alter their attitudes about their jobs and think of themselves as "owners" to which fund managers and corporate stock issuers are accountable.

"There needs to be a degree of tension in that boardroom," Williams said. "If the institutional investor doesn't behave as an owner, the system is not going to work."

The admonishments came during a two-day meeting here of the Mutual Fund Directors Forum, a consortium of fund trustees based at the Northwestern University School of Law. More than 100 board trustees gathered to discuss ways that fund trustees can improve corporate governance. The event was hosted at the Watergate Hotel, perhaps an ironic location for the event, considering the site spawned one of the most virulent political scandals in the nation's history.

Williams, along with former SEC Chairman David Ruder, who oversaw the agency from 1987 to 1989, and Roderick Hills, chief from 1975 to 1977, concurred that trustees need to be more rigorous in monitoring their funds and seeking out independent, reliable information. Current SEC Chairman Harvey Pitt, who resigned late last year because of controversy surrounding his ability to curb corporate malfeasance, echoed his peers' comments during a separate speech later that evening.

Many of the former commissioners, who testified before Congress last year about how to prevent future scandal along the lines of the Enron implosion, said new rules and strict legislation, including Sarbanes-Oxley, are well and good. More importantly, however, attitudes in boardrooms need to change if real reform is to take shape (see MMFN 9/23/02).

"We've been told you work behind the scenes," Williams challenged the audience of fund trustees. "I haven't seen much evidence of that."

The Investment Company Institute should take on a new role to help trustees "operate as one," Williams suggested. "That way you can work together. If the institutional investor doesn't hold corporations accountable, who will? The unsophisticated investor?

"You have an important job ahead of you."

Hills said that the ICI has been encouraged to self-regulate the industry but has remained "a trade group." Trustees must step up to the plate to better serve shareholders on two fronts, Hills said.

First, prevent "outright stealing," the kind of fraud that "would take down" a fund company or decrease its assets, Hills said. Second, more closely "monitor fund managers' behavior, making sure that fees are reasonable and that investors are best served by brokers and other entities."

Many of the former SEC chairmen said that boards should not be chaired by the CEOs of their firms because those boards need to leverage pressure on corporate officers.

In addition, trustees need to garner independent information on funds and investment managers, according to the former SEC chiefs. And they should make sure that independent directors are, indeed, functioning independently.

"Audit committees have not done their job," Hills said.

An associate at a prominent law firm that handles fund compliance issues, who asked not to be identified, said that it makes perfect sense for fund trustees to face pressure over their job performance.

Pitt's Kindergarten Lesson

Pitt, later in the evening, echoed that trustees need to do a better job. His was a lesson a kindergartner might appreciate, a demonstration that corporate officers have not only broken SEC regulations, but have failed to meet basic ethical standards.

Quoting from a children's book called "How to Behave and Why," published in 1946, Pitt said that executives need to "be honest, be fair, be strong and be wise."

Pitt also suggested that fund trustees keep up with issues facing the fund industry and "do their homework," citing a recent notice from the National Association of Securities Dealers urging brokers to charge mutual fund customers the correct sales loads on their transactions (see "News Flash," page 7).

"Directors of load funds should be concerned that their investors are not overcharged," Pitt said. "To do this, I urge you to inquire into the policies and procedures concerning sales loads at each broker/dealer that sells your funds' shares."