SEC Chair's Mission
November 17, 2003
The mutual fund industry, while still viable and in position to bounce back, needs drastic changes and needs them now, Securities and Exchange Commission Chairman William H. Donaldson said in a sometimes scathing, sometimes positive speech.
"I am left with the conclusion that these [market timing and late trading] occurrences represent a fundamental betrayal of our nation's investors, and are symptomatic of a disease that has afflicted far too many in the industry," Donaldson said.
Making his first appearance as SEC head at the Securities Industry Association's annual meeting in Boca Raton, Fla., Donaldson was sometimes vague but always candid in addressing the shortcomings of the industry, and even the shortcomings of the SEC itself.
Donaldson is set to testify before the U.S. Senate Banking Committee this Tuesday, along with Matthew Fink, president of the Investment Company Institute. The Senate will then hold a second hearing on Thursday at which NASD Chairman and CEO Robert Glauber, SEC Enforcement Director Stephen Cutler and New York Attorney General Eliot Spitzer are scheduled to speak.
When Donaldson was specific about measures that have to be taken to remedy the current fund crisis, though, he did say the Commission would mull over a 2% redemption fee for short-term traders. The SEC is also considering a 4 p.m. cutoff time for fund firms themselves rather than intermediaries, two recommendations the Investment Company Institute also made.
Burton Greenwald, president of the Philadelphia fund consulting firm B.J. Greenwald Associates, said both of these recommendations would help prevent future transgressions in the industry.
On the redemption fee proposal, Greenwald said, "If it's applied uniformly, it could be effective in curtailing market timing." As far as the strict 4 p.m. deadline, Greenwald called that "absolutely essential."
"There's no compelling reason not to do that," Greenwald said. "Funds are a long-term investment, and if they can't be received on a timely basis by 4 p.m., [investors] will get the next day's price. That's not a problem."
But often, Donaldson's point was to place the mutual fund scandal in current and historical perspective and to remind people of the importance of individual investors rather than present specific guidelines or exact facts and figures.
"Investors, whether in the United States or abroad, must be able to see for themselves that your industry, and other industries, have moved beyond simple compliance with the new laws, and are living up to the spirit underpinning all of our securities laws," said Donaldson, 71 who was sworn in as SEC chief in February.
Restoring public confidence was a theme Donaldson went back to several times. He cited the similar circumstances that Joseph Kennedy dealt with during his first speech as SEC commissioner in 1934.
"It will be a major, long-term undertaking that will require companies throughout the securities industry to move beyond basic compliance and to establish new standards of integrity," Donaldson said.
In defending the investigative work of the SEC, which has come under criticism for allegedly discounting the warnings of some whistleblowers, Donaldson pointed to, though not by name, the civil fraud charges filed against Prudential Securities. He also made note of several other instances when the Commission charged individuals or firms for similar misdeeds, as well as the many times the SEC has cooperated with state regulators. And he vowed the SEC would keep at it.
"If there is more wrongdoing, we will find it and will punish the perpetrators," said Donaldson, who headed up the New York Stock Exchange from 1991 to 1995.
Donaldson also said that some questionable SEC investigation practices -- including the disregard of a complaint of market timing by union Boilermakers made by a Putnam Investments phone operator -- were being looked into. That happened in the SEC's Boston office, which has since seen its regional director, Juan Marcelino, resign for his office's slow response to the tip.
"Tips from whistleblowers are critical to our mission of pursuing violations of the federal securities laws. I want to be sure that there is appropriate follow through on this type of information and that they are given expedited treatment," Donaldson said.
No Declaration of Independence
One area that Donaldson did not touch on was the question of independence on fund boards. The ICI had addressed it in its proposals, proposing stronger codes of ethics without saying exactly what the limit of insiders should be on boards.
Currently, a bill introduced by Democratic Sens. Joseph I. Lieberman of Connecticut and Daniel Aikaka of Hawaii proposes that fund boards be forced to have 75% independent members. Greenwald said the industry is open to such a change.
"The industry has no problem with that, and I would think given the current climate, that is not something the industry would oppose," Greenwald said. "It's probably a constructive thing."