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Less Complaining, More Compliance, Roye Says


PALM DESERT, Calif. - The mutual fund industry is entering a "new era of accountability" and should prepare to take a leadership role in restoring investor confidence.

That was the message delivered last week by Paul Roye, director of the division of investment management at the Securities and Exchange Commission, as industry members gathered for the 2003 Mutual Funds and Investment Management Conference, sponsored by the Investment Company Institute and the Federal Bar Association.

The allure of the warm California sun and the resort's breathtaking golf courses drew more than 1,000 investment professionals, including many of the industry's so-called bean counters. But while the desert air was filled with chatter about tee times and massage appointments, it was clear from the outset that the assembled panels had a meaty plateful of issues to discuss.

Matthew Fink, ICI president, sang the same old tune in his keynote address, applauding the industry's perseverance through a "grinding bear market" and series of "egregious corporate scandals."

Fink maintained that despite the treacherous landscape, the industry has remained "steady, calm and rational" and has not suffered mass redemptions. He cheered the industry's proud history of addressing investors' needs and serving them well, while remaining "free of systemic scandal."

Fink cautioned the audience about the emergence of a "regulatory bubble," alluding to the passing of the Sarbanes-Oxley Act and recent scrutiny of industry practices by the Securities & Exchange Commission and the House Committee on Financial Services.

Rankled by the increasing criticism of industry practices, the ICI has continually complained that mutual funds are being singled out as a scapegoat for problems that it believes are more prevalent in other industries within the investment community. Fink referenced the dramatic collapse of the savings and loan business in the 1980's to put the mutual fund industry's success in perspective. He even went as far as to quote football legend Vince Lombardi to support his position.

But Roye dismissed such a notion, saying that the industry cannot rest on its laurels and should prepare to take the necessary steps to rebuild investors' confidence in the financial markets. He accused the ICI of asking the wrong questions regarding compliance and being too wrapped up in what other industries are doing.

"Fink is too worried about what little Jimmy down the street is doing," opined one conference attendee.

Roye asked that executives, auditors, independent directors and others in the fund arena stop passing the buck when it comes to identifying breakdowns in the system. Recalling an old adage, Roye said, "When you point your finger at someone, your other four fingers are pointing at yourself," a slam directed squarely at Fink, who has vehemently opposed the disclosure of proxy votes mandated under Sarbanes-Oxley.

Roye also warned against subscribing to the herd mentality in terms of marketing the hot product, which is never in the best interest of the investor. "Fund organizations must have a conscience," he said.

Roye echoed the sentiment of new SEC Chairman William Donaldson, saying that the industry should take a lesson from the U.S. military by being "quicker, more agile and proactive" in its approach. In essence, he asked that it take steps to anticipate problems before they occur. "In order to restore their trust, American investors must see businesses shift from constantly searching for loopholes and skating up to the line of legally acceptable behavior," Donaldson said in a speech to the Practising Law Institute back in February.

Specifically, Roye mentioned fund organizations' failure to deliver breakpoint discounts to investors. In a recent survey conducted by an SEC task force, 41 out of 43 broker/dealers overcharged their customers an average of $360, with some amounts totaling up to $10,000 on a single transaction. The cases were largely unintentional and were attributed to sloppy execution, the task force revealed. "Nonetheless, it will not be tolerated," said Lori Richards, director of compliance inspections and examinations at the SEC.

The sparring session set the stage for several high-profile industry figures to weigh in on the state of the industry in a roundtable discussion. Avi Nachmany, executive vice president and director of research at Strategic Insight, painted a pleasant picture of things, reminding everyone that retirement investing is not going away. While he conceded that the next 18 months will be a "period of disengagement", he asked the crowd to "look beyond the valley" and focus on the positives. The fact that the industry manages $6.5 trillion in assets, for one. And also that two-thirds of the industry has had positive net inflows during the bear market.