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Fund Execs Lash Out on Sarbanes-Oxley

ORLANDO, Fla. - As New York State Attorney General Eliot Spitzer continues to focus on fund executives who have broken the oldest rules in the books, others in the industry gathered at the Investment Company Institute's Tax and Accounting Conference here last week to try and figure out how to comply with some of the newer regulations.

While it has been more than a year since President George W. Bush signed the Sarbanes-Oxley Act (SOX) into law, it was more than obvious that those down in the trenches implementing the regulation are still wading through the minutia of the rules.

The rule's effort to change the "tone at the top" has clearly made some headway, but still has a long way to go. The feeling at the conference was that the industry has made an honest attempt to implement several portions of the rule but still has questions.

Heidi Stam, a principal at Vanguard and a moderator at the conference, said that she was "overwhelmed" by the number of questions she received from the audience. The majority of the inquiries were very specific, reminiscent of nosy neighbors peering into windows to catch a glimpse of what others are doing. Several wanted to know whether firms use sub-certification.

Meanwhile, panelists unhappy with aspects of Sarbanes-Oxley took the opportunity to take potshots at regulators. Forrest R. Foss, associate legal counsel and a VP at T. Rowe Price, said he thought certification of shareholder reports, particularly the president's letter, has caused them to become more impersonal. In an effort to build credibility with shareholders and increase their understanding, the regulation has had a detrimental affect, actually encouraging management to disclose less and speak more cautiously and conservatively, Foss said.

He said that executives don't want to be second-guessed and possibly face legal ramifications for good-faith efforts to provide insight into the future business of their companies. "Management is already held to antifraud standards," he noted. T. Rowe Price tries to avoid the pitfall by separating this part of the report, he said.

However, not everyone thought that direction was the best or smartest way to go. "Vanguard doesn't separate it," Stam said. "We keep it together. However, the rule has forced us to take a closer look at it." Tai-Chin Tung, financial chief of Charles Schwab Investment Management, echoed Stam's sentiments.

Adeel Jivraj, another speaker and the chief accountant at the division of investment management at the SEC, said he was "perplexed" by some of Foss' assessments, and often sparred in turn with the T. Rowe Price executive on a number of issues. Jivraj said that if the information is mailed in a separate envelope than the shareholder report, then firms are in compliance - but that matters get sticky if they are merely separated within the same envelope. He said that shareholders may not always understand the difference and that a mere staple separating the report and a letter may not be enough to be in compliance with the rule.

Changing the Status Quo

Despite the confusion and differing opinions, regulators nonetheless attempted to hammer home the point of changing the tone at the top of organizations, which they said is a key to the regulation yet something that will be a little more difficult to measure. Daniel L Goelzer, a board member of the Public Company Accounting Oversight Board and a keynote speaker, said the organization will check into the values that management tries to instill in employees. The board wants to see how promotions and rewards are doled out and how firms choose customers. He echoed Chairman William McDonough's assertion that those that do not follow the rule will face grave consequences. "Our job is to help the accounting industry to justify its existence, which is to bring confidence to the investing public," Goelzer said.

The accounting industry should keep in mind that this is not the most dire time in its history, he said. It faced its largest scandal in the 1930s and numerous others throughout the years. "Each scandal has resulted in tougher standards," Goelzer said. "It's critical to the long-term health of our industry. The accounting industry should be the watchdogs for the investing public, not lap dogs of their corporate clients."

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