Speech by SEC Staff:
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
Good afternoon. It is a pleasure to be here and I would like to thank Susan Wyderko, Allan Mostoff, David Ruder and the officers and directors of the Mutual Fund Directors Forum for inviting me to speak with you today. I always think my, or any regulator's, time is well spent if we can sit down and engage in a dialogue with independent fund directors. And I greatly appreciate the opportunity to do so. Before I begin my discussion, however, I am obligated to remind you that my remarks today represent my own views and not necessarily the views of the U.S. Securities and Exchange Commission, the individual Commissioners or my colleagues on the SEC staff.
The role that fund directors, especially independent fund directors, play is critical to the meaningful oversight of the fund industry. It is essential that you be successful in your positions as "independent watchdogs;" otherwise, fund investors suffer. Much of my 30 plus years of experience in the fund industry has been spent working with fund boards, either as a board member or - more frequently - as a management representative during fund board meetings (and in between fund board meetings). As a result of this experience, I have a genuine respect for the work that you perform, the dedication you bring to your oversight role and the challenges you sometimes face as you seek to effectively represent investor interests in the boardroom.
II. Outreach to Fund Directors
Since joining the SEC as Director of the Division of Investment Management, I have made two key observations regarding the Division's approach to fund directors. First, the respect the Division has for fund directors runs wide and deep. Many of my colleagues share my positive assessment of the valuable oversight services you provide. Second, while many of us agree on the benefits of engaging in a meaningful dialogue with fund directors, many times the dialogue fails for two reasons.
First, the discussions often occur with intermediaries or representatives for fund directors, rather than with directors themselves. It is beneficial for me to hear the views of your independent counsels and others who represent you, but it is more beneficial for me to hear your views, in your own words. Second, when regulators engage in dialogues with fund directors, I find that regulators-myself included-tend to do a lot of talking, but I don't know how much listening we are doing.
As a result, I have committed to focus this year on reaching out to fund directors, with the ultimate goal of determining what the SEC and the staff of the Division of Investment Management can do to enable you to be more effective in your oversight role. My goal is not to make your jobs easier, but to allow you to be more effective. Your input will be critical regarding what you think would help you accomplish that goal.
In considering this goal, I recommend that you focus on the responsibilities that are placed on fund directors in the U.S. regulatory regime. There are a number of specific obligations that fund directors have under the federal securities statutes and SEC rules. I believe it is time to catalogue and focus on those responsibilities and see whether revisions and/or further SEC guidance are needed to enable directors to be more effective and to allow you to focus on the areas where your oversight may be most critical-particularly areas involving conflicts of interest.
I have already begun-and will continue to-reach out to fund directors to solicit your views on these topics. The securities statutes and SEC rules impose significant obligations on you. On some level, you are serving in an oversight role that otherwise would need to be filled by regulators if you were not in place.
Needless to say, in most cases, you as independent directors are better positioned to serve in an oversight capacity than regulators would be. As fund directors, you hold board meetings on a periodic basis; you understand the funds you oversee and their shareholders' expectations; you make frequent determinations about fund fees and operations; and you interact on a personal basis with fund management. You therefore have far more intimate knowledge of the funds you oversee, their service providers and personnel, and the needs of the funds' investors, than we as Washington regulators could ever have. We and fund investors need you in place and effective because you are a critical complement and supplement to the mutual fund regulatory regime.
As a result, I believe that we as regulators have an obligation to listen carefully to you. We need to hear about appropriate steps that you, as fund directors, believe are necessary to enhance your effectiveness and to enable you to focus in the boardroom on areas where you can add the most value-rather than focusing your attention on simply meeting regulatory requirements. Having fund directors spend their time on rote reviews or bureaucratic exercises is not in anyone's best interests, particularly investors-and is not a productive use of fund directors' time and energy.
I look forward to continuing my dialogue with fund directors on this important topic - and most importantly listening to what you have to say about steps the SEC or its staff can take to help you do your jobs better. As an important part of this process, I have already attended one board meeting and plan to attend more, and I expect to listen, and learn, quite a lot.
Another issue that, based on my experience, I believe is essential for fund directors to be effective is the nature, quality and timeliness of the information you receive for your board deliberations. For the most part, fund directors are dependent on the fund's adviser and other service providers for the information that you need. Your deliberations and decision-making can only be as effective as the information you receive permits them to be. I have been on the other side of the process. I have personal experience in the types of information you should be receiving-and how it can be synthesized and presented to make it more valuable to you.
I also know that one of the worst mistakes a fund adviser can make is to fail to disclose relevant information to its board. First-and most importantly-it's wrong and it alienates boardmembers. Second, it is no way to run a good business. Finally, one of the best protections a fund adviser has is a well-informed board exercising its business judgment. This protection evaporates if the board is poorly informed.
You as independent directors should be encouraging your funds' advisers and other service providers to provide you with meaningful and helpful information - in a timely manner. You should know that I certainly will be encouraging them to do the same.
The quality of the information fund managers provide fund boards likely is indicative of a more fundamental issue that should be a concern for every fund director: the firm culture of the investment adviser and other service providers to the funds you oversee. As fund directors, you should have a sense of the culture of your funds' major service providers and whether that culture is conducive to promoting the interests of your funds' investors. It is imperative that a fund's adviser have a fiduciary mindset. As fund directors, you should expect nothing less. You, as fund directors have a tough challenge if the firms managing the funds you oversee have a culture that promotes self-interest and turns a blind eye to conflict. In my mind, an investor-oriented firm culture is essential to being a successful fund manager.
Another piece of advice that I continually give to fund managers is to get back to basics. Fund managers should be focusing on their basic compliance duties and obligations, some of which have - surprisingly - been overlooked. For example, the Investment Company Act prohibits the payment of a dividend or distribution from any source other than net income unless the payment is accompanied by a written statement identifying the source of the payment. This is a basic and fundamental requirement. However, last year, the Commission settled a case in which three closed-end funds, over a four-year period, made 98 distributions that included a return of capital. None of those distributions was accompanied by the required written statement. I was shocked that a requirement so fundamental was so thoroughly ignored.
Similarly, I recently was looking for some very basic required filings for some of our registrants related to fidelity bonds. I was quite surprised that some registrants had not made the filings, despite the clear requirement to do so.
I raise these issues because you as fund directors should be focused on the very basic as well as the esoteric. Sometimes, we spend all of our time and energy on the most challenging of issues, but I have a concern that some of the basics are not being properly attended to. As directors, you should make sure the tires are being kicked by management and others. You should ask your CCOs to spot check compliance systems in order to ensure that fund investors are not subject to potential harm from breaches of basic regulatory requirements.
III. Interactive Data Tagging and Mutual Fund Disclosure Reform
While outreach to fund directors is one of my top priorities for 2007, there are other areas that my Division will focus on during the course of the year.
Mutual fund disclosure reform and interactive data tagging are a top priority for the Division and for Chairman Cox. On January 4th, the ICI released for public review the draft taxonomy that it developed for tagging the data in the risk/return summary that is at the front of every mutual fund prospectus. The risk/return summary contains information that is important to an investment decision, including investment objectives and strategies, costs, risks, and historical performance information. The ICI's release of the draft taxonomy is a welcome development, offering the potential for tagging of prospectus information that is important to mutual fund investors' investment decisions.
On February 6th, following a January 31st Open Meeting, the Commission issued a proposing release requesting comment on permitting funds to use the new ICI taxonomy for the purposes of tagging their risk return summaries in the Commission voluntary interactive data filing program. Comments on the proposal are due March 14th.
I am very hopeful that the proposed risk return summary tagging program will be successful. I encourage you to consider whether the funds you oversee might participate in the voluntary program, if it is extended as proposed, so that we can fully test the usefulness and utility of the interactive tagging system.
As I always emphasize, in my view, mutual fund disclosure reform and interactive data are closely tied. It is difficult to pursue significantly streamlined disclosure reform without providing the ability for fund investors to access more detailed information through the interactive data initiative. The ultimate goal of the Commission's disclosure reform initiative is Giving Investors the Information They Need, in a Form They Can Use. A more long-winded way of describing the goal is facilitating more user-friendly, plain English mutual fund disclosure and streamlining the delivery of mutual fund information through the increased use of the Internet, interactive data, and other electronic means of delivery.
The disclosure reform initiative the Division is currently considering would permit funds to offer securities pursuant to a streamlined disclosure document (my personal preference is for a two-page document) that would be delivered to investors-either electronically or on paper-while requiring a more detailed document to be available on the Internet or delivered in paper upon request. The streamlined disclosure document I envision would include key information necessary for an investor to make an investment decision, such as fees and expenses, risks, investment objectives and strategies, and historical returns. One model we are looking at closely is the current profile prospectus. Another issue we are examining is whether to update and streamline shareholder report requirements, including permitting mutual funds to provide more detailed information via Internet posting or in paper form upon request.
I expect that, as fund directors, you have a fundamental interest in ensuring that fund investors facing the daunting challenge of deciding where to invest their hard-earned monies have access to meaningful and helpful information about a fund-and alternative funds. I believe that the current disclosure regime has not been fully successful in communicating effectively with fund investors. Therefore, it seems appropriate to consider making significant-even radical-changes to our disclosure requirements, rather than making small changes around the edges. For these reasons, I believe that our interactive data tagging and simplified disclosure initiatives hold great promise for mutual fund investors.
IV. Agenda Priorities
Other initiatives on the Division's agenda that are of interest to fund directors include additional guidance for fund directors on fair valuation as well as a proposal regarding standardized disclosure and fund director guidance on soft dollars and oversight of placement of fund trades. In addition, I have stated that rule 12b-1 is an issue I would like to address during my tenure as Division Director, as well as an overhaul and modernization of the Investment Adviser and Investment Company books and records rules. My Division is also pursuing a renewed focus on codification of exemptive rules in order to relieve the burden on our exemptive applications office and permit greater competition.
With that, I believe it is time for me to follow my own advice and stop talking and start listening. I would again like to thank you for the commitment you make to America's investors by serving as independent fund directors. I know this is no easy task, but investors are far better off because of the dedication, tenacity and judgment that you exhibit in your important "watchdog" roles.
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