Week in Review
October 22, 2007
Backlog of Cases Puts SEC's Future in Question
With a backlog of mutual fund and hedge fund cases at the Securities and Exchange Commission, the departure of two Democratic commissioners and SEC Chairman Christopher Cox's unusual vote in favor of two contradictory proposals on shareholders' rights to nominate board trustees, the future of the SEC is in question, the Los Angeles Times reports.
But as recently as this past summer, the SEC seemed like a unified group, and Cox was being heralded for creating a sense of unity at the SEC, which had been known for acrimony for years.
"If you're looking at a man trying to hold the moderate group [and] maneuver through very partisan waters and come out above it," the SEC's testimony before the Senate Financial Services Committee in June "is as good an exhibit of that as you will find," said Damon Silvers, associate general counsel at the AFL-CIO.
"Chris Cox has done a fine job of leading the Commission," said Harvey Goldschmid, a former SEC commissioner and now a law professor at Columbia University. "But he is now entering a period where his leadership skills and ability to remain on a balanced course will be severely tested."
Shareholder activists are now sharply critical of Cox for voting in favor of two contradictory proposals on shareholder rights. The first would prevent shareholders from being able to nominate board members. The other would only allow shareholders with holdings of at least 5% of outstanding stock, held for at least a year, to name director candidates on a proxy slate.
"Certainly, when you have a chairman vote for two conflicting proposals at the same time, it's problematic," said Lisa Woll, chief executive officer of the Social Investment Forum. "It's very unclear from his votes what his actual view is, because he's taken two views."
Vanguard's, Fidelity's Retirement Income Funds Take Very Different Tacks
Fidelity and Vanguard recently introduced retirement income funds, and while they both offer monthly payments that can vary from year to year, they are actually very different from one another, The Wall Street Journal reports.
Fidelity's funds spend the assets down over a period of time that investors select, much like a target-date fund. Vanguard's funds make payments that are calculated based on a rolling three-year average account balance. Investors can select target withdrawal rates of 3%, 5% or 7%. The 3% rate is if they want their balance to grow, while the 7% withdrawal rate is still meant to keep the balance steady.
But critics say that if the market should drop, monthly payments could ostensibly go to zero. Also, people who underestimate how long they will live could end up with no money years before they pass away.
As Funds Turn to Complex Securities, Prices at Risk
While the closing of the hedge fund at Dillon Read was due to the difficulty in valuing subprime mortgage-backed holdings, the problem of fair valuation is permeating a wide number of other hedge funds and mutual funds, The Wall Street Journal reports.
In fact, the prices for far less than half of securities traded on exchanges are readily available, according to Daniel Harris, an analyst with Goldman Sachs.
Certainly, Warren Buffet has long called for more price transparency. "Some markets can be pretty imaginative. They call it marking to market,' but it's really marking to myth."
Commenting on the lack of available prices on bonds, typically published in what is known as the "daily axe" or "daily run," Greenwich Associates Consultant Timothy Sangston said, "There is a general reluctance on the part of dealers to be publishing prices, because it is so uncertain and there is not a lot of liquidity."
The Securities and Exchange Commission is now examining how mutual funds value their securities.
Fidelity Wants to Split Fund Board in Two Due to Complex Holdings
Fidelity Investments will ask shareholders early next year for permission to split the board of directors overseeing its mutual funds in two. The aim is to better monitor the complex securities its portfolio managers are increasingly gravitating to.
One board will oversee equity and high-yield funds, and the other bond, money market and asset-allocation funds.
Fidelity expects that its product mix will become increasingly diverse and that the need for two specialized boards will grow, Ned C. Lautenbach, one of the members of the Fidelity funds board, told the Boston Globe.
Currently, there are 11 people on Fidelity's board, only two of whom are interested parties. They are Fidelity Chairman and CEO Edward "Ned" Johnson and James C. Curvey, a longtime Fidelity executive. By splitting the board in two, the company will seek additional directors.