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SEC Copes With Workload, Congress, Budget

PALM DESERT, Calif. - The Securities and Exchange Commission will certainly have its hands full for the next 12 months, as a spate of issues within the mutual fund industry have landed in its crosshairs. Despite a robust agenda, the SEC told fund executives at the Mutual Fund Investment and Management Conference two weeks ago that it will "marshal all of the resources [it] can" so that each item is carefully examined and dealt with in a timely fashion.

But many skeptics are saying that recent intervention from Congress will only serve to protract an already slow-moving process. The House Committee on Financial Services recently sent a letter to SEC Chairman William Donaldson advising him to review the merits of up to 18 industry practices following an airing of the grievances on Capitol Hill last month. The recommendation from the House is yet further evidence that Chairman Michael Oxley plans to continue his crusade to improve corporate governance and restore investor confidence.

More importantly, it leaves the SEC in the lurch to the extent that it adds a lion's share of work to the heap of proposals already on its plate. The longstanding complaint from the SEC is that it is asked to cover all the bases with limited appropriations. Now, more than ever, the SEC is in need of a more extensive budget, according to ICI Senior Counsel Amy Lancellotta, a panel member at the conference.

While it was evident from the facial expressions of the panelists that the SEC would be stretched thin in handling that workload, Paul Roye, director of the division of investment management at the SEC, maintained a perspective on the seemingly daunting task.

"Any time we receive a letter from Congress, we take it very seriously," Roye said. He also stressed the importance of cooperation between industry leaders and the SEC as the best way to expedite reforms.

One major point of contention is the pending compliance officer rule. The SEC has recommended that fund complexes appoint chief compliance officers and put specific internal compliance programs in place. "I can think of 13,000 reasons" for this requirement, said Lori Richards, director of the office of compliance, inspections and examinations at the SEC. "There are 5,000 funds and 8,000 advisors," she quipped.

The industry, which has been operating under an informal procedure for many years, opposes the proposal, citing its strong track record in dealing with potential conflicts. The SEC, however, wants more stringent compliance procedures similar to those in the banking and broker/dealer industries, which have a mandated and comprehensive set of requirements.

"Codified procedures and experienced compliance officers will limit potential violations," Richards said. She noted that slack controls enable violations to go undetected. She also addressed confidentiality concerns, stating that compliance records would not be made public.

In a related issue, members of the panel discussed the possibility of forming a self-regulatory organization, or SRO, in order to actively police the industry. Glen Payne, senior vice president and general counsel at Invesco Funds Group, expressed his staunch opposition to the proposal, saying it wouldn't eliminate regulation but, rather, cause duplication in exams. He dubbed the proposal "a phoenix rising from the ashes," alluding to the fact that it manages to resurface every five or six years after being squashed.

"It doesn't necessarily mean duplicity," Roye retorted. "It doesn't have to supplant the SEC." Roye noted that it would serve as more of a supplementary body. Richards agreed, saying, "The SRO staff brings expertise the SEC may not have."

Roye continued to hammer away at various issues, including soft dollar arrangements, 12b-1 fees and breakpoint discounts, which were among the 18 points in Congress' letter. With respect to the soft dollar issue, Roye acknowledged that the SEC has been investigating that problem for many years, and he suggested there is some overlap in many of the areas outlined by Congress. He offered stricter record keeping as a possible solution.

"Oral agreements using soft dollars creates confusion and potential conflicts," Richards said, adding that they should be eliminated altogether.

As for investors not receiving breakpoint discounts, Richards said that a SEC task force would be cracking down on the problem, calling it a "disturbing" development. Roye again flexed his muscle on the panel, saying that fund companies need to take more responsibility for the viability of such features. "You can't just bury your head in the sand on this issue," he said rather rigidly.

Some panelists suggested putting breakpoint discounts back in the prospectus would help alleviate the problem of overblown fees. Marguerite Morrison, a vice president and chief legal officer at Prudential Investments, dismissed the idea. "The cost of putting breakpoint discounts back in the prospectus will be borne by the investor," Morrison said.

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