Op-Ed - Investors Will Ultimately Pay
January 5, 2004
My primary concern remains that Congress, and to a lesser extent the SEC, will rush forth some "cure-all" measures, rules, regulations and laws that are poorly conceived, perhaps along the lines of Sarbanes-Oxley.
With each new regulation that I hear proposed, I see a direct, and oftentimes unnecessarily negative, impact on the fees mutual fund shareholders will pay. A comment I heard recently seems to be particularly applicable at this time: Any law that passes unanimously can't be a good law.
Obviously the SEC is feeling a tad bit embarrassed by "outsiders" stepping on their turf, but hopefully their normal, reasoned approached to new rules and regs will prevail.
It is worth keeping in mind that many of the the practices that are now being viewed as evil, such as revenue sharing, have been readily apparent - and regularly written about - for years.
Odd, it seems, that the SEC would now want to discuss items such 12(b)-1 fees when these fees have been allowed to remain on the books for years without ever having fulfilled their original purpose/promise (see related story, page 1).
Clearly, there are those in Congress and other state government roles who see a lot of political gain to be had in representing the interests of the nation's 95 million investors.
A bad situation - created by what is still believed to be a relatively small group of investment managers and distributors - could be made worse by those at the center of the solutions, who, while well-meaning, are somewhat ill-informed about the applicability of certain securities laws let alone the practical realities of enacting some of the new recommendations.
Major Hype Phase
Realize, now, that we are still in the major hype phase and that the use of broad bushes to paint a horrible picture of the entire industry is somewhat to be expected at this point. But my hope is that those people who will be driving the creation of new rules develop a thorough understanding of all the issues involved (i.e. the role of omnibus accounts, the impractical notion of annual bidding on management contracts, the reasonableness of expectations of independent directors) so that facts, rather than hyperbole, can guide the regulatory decisions.
An example of some of the negative results may well be found in the view of soft dollars. While the ICI appears willing to give up soft dollars in an effort to regain some positive momentum, this issue has been thoroughly examined by the SEC with little evidence of improper practices or conflicted interests. At the other end of the spectrum are issues like fair value pricing that seem like a "no brainer" to implement.
Yet, surprisingly, the ICI does not appear to be able to support this initiative. I do wonder whether the image of the ICI is too badly damaged for the group to be effective in support of their members in the foreseeable future. Certainly some people have come to conclude that the ICI's position as investor advocate was a means of protecting their members' business interests.
I also wonder if at the end of this if investors will begin to focus more on the costs of investigation, prosecution and new regulation versus the actual damage done to their portfolios. While I believe the illegal and unethical practices absolutely had to be stamped out, it is difficult to imagine investors sending out thank-you notes to the people that secured them their 50-cent restitution check.
The sense of outrage among investors that so many in government and the media continue to search for simply will not materialize when the average equity mutual fund is up over 20% this year. I believe we are close to the point where the AGs and Congressmen are going to negatively impact the decisions/views of investors by undermining the credibility of the entire asset management industry - the ramifications of which could be severe.
Neil Bathon is president of Financial Research Corp.
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