Execs Take Case to Court of Public Opinion
March 1, 2004
The SEC's top regulators have chastised mutual funds. State regulators have fired harsh salvos at them. And to put it quite mildly, the national press has gone to town.
Now, fund company executives whose firms have been implicated in the fund scandal are firing back with heavy-handed letters to their shareholders with more candor and criticism of regulators than previously seen.
Three open letters to fund investors have appeared on company Web sites and as a full-page ad in The New York Times recently, including ones from Fidelity Investments of Boston, Franklin Templeton Investments of San Mateo, Calif., and PIMCO of Newport Beach, Calif.
Fidelity Chairman and CEO Edward C. "Ned" Johnson III, who recently weighed in with his concerns over proposals to mandate that fund board chairmen be independent, has now also addressed the overall industry mess, cautioning legislators to tread carefully in areas they do not know well. Fidelity has not been implicated in the fund scandal.
Franklin and PIMCO, on the other hand, have refuted the specific charges that state regulators have levied against them. Both candidly talk about the particular arrangements state regulators have railed about.
The comments now emanating from fund companies are definitely stronger and more direct than those we have seen. Not only is the language powerful, industry insiders say, but the disclosure is more robust and more frank. It's not every day one gets a letter from Bill Gross, PIMCO chief investment officer, referring to "rascals."
Moreover, while companies were previously determined to distance themselves from the industry's misdeeds, now they are stepping right up to the plate to get their points front and center.
"These companies are not letting the issues define them. They are defining the issues," said Bill Blase, president of W.T. Blase & Associates in New York.
They "believe there is a need for proactive and emphatic stating of their positions, and reassurance that they are putting the interests of shareholders first," said Scott Tanner, principal of Millennium Media Consulting of Alexandria, Va. Given the rash of various allegations and the intense scrutiny of the media, fund companies don't want to leave public opinion to its own devices, he added.
"They want to get their messages out in a very structured and strategic way, and I think we will see more of this."
Stop the Siren Song'
Fidelity's Johnson cautioned that to cure the industry's ills, legislators will be required to exhibit "shrewd judgment." Quick fixes, intended to stop current mistakes or wrongdoing, could have unintended consequences, he said. "In addition, impractical and complex rules that don't apply to the entire investment industry could well put mutual funds at a disadvantage in attracting and holding talent, ultimately harming the interests of shareholders," Johnson said.
"Congress must make certain that it is informed about the intricacies of the entire mutual fund industry - not just one part of the business - to ensure that it is not tempted to regulate based upon the siren-song of self-interested individuals and groups," Johnson summed up.
He also offered up his ideas for curing what ails the industry. These include establishing a regulated central clearinghouse to handle all mutual fund trades, such as the structure that already exists under the Depository Trust & Clearing Corp., strengthening fair-value pricing and beefing up short-term redemption fees.
Although its executives are more accustomed to being the voice of commentary about the bond market, PIMCO is now on the defensive. In response to the civil lawsuit and a host of accusations filed by New Jersey State Attorney General Peter Harvey on Feb. 17, Gross and PIMCO CEO Bill Thompson soon afterward posted a letter to the PIMCO Web site: "Sometimes a cleansing process can go too far. . . . Allegations are different from facts."
Refuting charges that PIMCO allowed Canary Capital to execute 200 market timing transactions to the tune of a collective $4 billion, PIMCO's duo of Bills, Gross and Thompson, that is, openly admitted that they did business with Canary, but never engaged in a "sticky asset" quid pro quo arrangement.
"Yes, unfortunately Canary/Stern became an investor in our funds," Gross and Thompson admitted. "The investments we knew about, clearly acknowledged as timer' money and made under monitoring provisions, were made under an arrangement that did not violate the shareholder protection of our prospectuses," the letter added.
"In perfect hindsight, we wish we had never attracted the name Canary/Stern among our many thousands of loyal fund shareholders."
While other investment firms have largely acknowledged any suspect transactions in very generic terms, Franklin Templeton got down and dirty and provided investors with the details of its deal, albeit from its own perspective. "We are absolutely committed to keeping all clients, shareholders and employees up to date," said Lisa Gallegos, a spokesperson.