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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Remarks Before the Mutual Fund Directors Forum


Brian G. Cartwright

General Counsel
U.S. Securities and Exchange Commission

Washington, D.C.
February 15, 2006

Good afternoon. It’s a great pleasure to be here.

I certainly will understand if you find it a bit disappointing that I’m here, and not Chairman Cox. I can assure you that he’s at least as disappointed as you are.

I’m happy to be able to report, though, that his recuperation after his recent surgical procedure is going very well, and we’re all very much looking forward to having him back in the office in the not-too-distant future.

So, let me begin by taking this opportunity to join with Chairman Cox in absentia in thanking: the Mutual Fund Directors Forum, its distinguished leader, and former SEC Chairman, David Ruder, and its membership of independent directors—each of you for all you do for the investors of America.

Your organization is held in very high esteem, as is evidenced by the presence at this conference of Congressman Richard Baker, a 20-year veteran of the House and Chairman of the Financial Services Subcommittee on Capital Markets, and of former SEC Chairman William Donaldson, who had a legendary career on Wall Street before taking over the SEC during a period of unprecedented activity.

Both Congressman Baker and Chairman Donaldson will be speaking here later.

One thing I have to be careful to say at the outset, before I forget: the views I express today are my own and do not necessarily represent those of the Commission or other members of the staff.

OK, with that disclaimer out of the way, I of course also want to thank Susan for her kind introduction. As you know, Susan’s our acting director of the Division of Investment Management, and like me she’s new at her job.

One difference, though: Susan’s been at the SEC for 20 years and, by this coming Friday, I’ll have been at the SEC for 20 business days.

That’s why I’m very much looking forward to the arrival of John White, our new director of the Division of Corporation Finance, not just because I know he’ll be great—and he will be—but also because after he shows up I’ll get to be senior to somebody.

Chairman Cox named Susan acting Division chief last month because of the dedication she demonstrated in addressing the needs of the individual investor in her five years as Director of the Office of Investor Education and Assistance.

In that position, Susan championed the use of the latest technological innovations to bring investors and the Securities and Exchange Commission together. As I’m sure you know, the use of technology, particularly the application of interactive data to filings at the SEC, is one of Chairman Cox’s priorities. So, later in my remarks today, I’ll talk briefly about this important initiative, because it’s about to become much more important in mutual fund investing.

As Director of the Office of Investor Education and Assistance, Susan’s job was to stay on top of the problems retail investors encounter. In carrying out that responsibility, she never allowed the necessary complexities of our daily work at the SEC to cause her to lose sight of either the big picture—or the little guy.

As I’ve come to know personally in the last few weeks, the SEC actually is a very friendly place—unless of course you’re a crook, in which case we aim to be your worst nightmare. But it’s just a fact that any large agency can seem impersonal and forbidding if you’re an outsider.

That’s why Susan made sure that on our investors’ hotline—another project she spearheaded—as Susan put it to the AARP Bulletin: “we treat callers as if they were our own mother.”

What better experience than that for someone now holding the fort at Investment Management, the division that oversees mutual funds and investment advisers?

Today, half of American households own mutual funds. That makes mutual funds the investment of choice for the individual investor—by far. Mutual funds today are the depository of America’s dreams, from college plans to retirement goals.

It’s a no-brainer why investment in mutual funds keeps growing. Medical and technological advances, together with the deeper integration of the world economy, have radically changed our world in very short order.

The expectation of living a longer and healthier life is my definition of progress, as is the fact that virtually all the fascinating gadgets we all use at work or play today—from iPods to the Internet to TiVo—have come into being in just the past few years. How many younger people today use the “cc.” function on their Blackberries without really knowing what that means? But I’m old enough to have actually blackened my thumbs on carbon paper. And I used to use a slide rule. You don’t see many of those these days.

Meanwhile, new technology has also made the globe a much smaller place, and has put all this bounty within the reach of shoppers not just in New York and Peoria, but also in Paris, Istanbul and Shanghai.

More and more, Americans understand that, with longevity rising, and competition going global, they have to take personal control of more aspects of their lives, and rely less on ephemeral promises. We Americans have to be, not just thrifty, but also smart with our investments.

This link between thrift and industry, longer lives, technological innovation and an international outlook is personified in a founding father whose 300th birthday we celebrate this year. I’m referring, of course, to Ben Franklin. Franklin’s name has become almost synonymous with the virtues of thrift and industry, to the point that over the last couple hundred years any number of banks and investment funds have chosen to name themselves after him.

I don’t think it’s a coincidence that Franklin—who by the way lived to be 84, at a time when the average life expectancy was under 40—was no stranger to technological innovations. In fact, as you know, he was responsible for a quite a few major inventions himself. Nor is it a coincidence that Franklin was one of the best traveled and most international-minded statesmen of his time.

Exemplifying the virtues Franklin represented, industrious and productive Americans work hard for their money, and they want—and deserve—their money to work hard for them too. And that’s driving them to securities products.

Let’s look at what’s been happening over time. According to Federal Reserve data, as late as 1984 bank deposits, including CDs, represented over 55% of total household liquid financial assets.

But fast forward to today. That number’s been cut in half. In the third quarter of 2005, bank deposits had fallen to just about 28% of household liquid financial assets, with the remainder—about 72%—an overwhelming majority—accounted for by securities.

At the same time, we know that many investors don’t want to—or just can’t—do all the due diligence on a single company, or put together a portfolio of different stocks, bonds and other securities whose profile, maturity and risk fits their needs and circumstances.

It’s not just that they don’t have the expertise—although some of them clearly don’t. It’s also that they don’t have the time. You certainly can count me in that category.

In looking at who owns the lion’s share of mutual funds, you find that it is the most active cohort of our population. By a ratio of two to one over their parents and children, most mutual funds are owned by—yes, you guessed it—baby boomers.

My generation—if you can call those of us born between 1945 and 1964 a “generation”—owns around 50% of the mutual fund assets out there.

Our parents, the conquerors of the Great Depression and World War II, and our long-suffering children, share the rest, in about equal measures.

All of them know they want the benefits that come with diversification. But in many cases, alpha and beta are just Greek to them.

And when it comes to derivatives, what with heteroskedasticity and leptokurtosis and all that, well, few non-professionals can hope to keep up.

So, to invest, increasingly, they come to the mutual fund industry.

Let’s look back again at the situation a couple decades ago. The market value of mutual fund shares in 1984 represented less than 3% of the household sector’s liquid financial assets—an almost negligible share. Today, that number has grown—by about an order of magnitude—to 23%, the highest ever, and still climbing.

Which means: You’re the man (or the woman). You independent directors have responsibility for oversight of how mutual funds conduct their business, and in this day and age, with the vast wealth held by mutual funds, that’s an awesome responsibility.

Independent directors are the centerpiece of the mutual fund regulatory regime. As the individuals charged with monitoring conflicts of interest, overseeing management and representing shareholders, you have a critical responsibility in the mutual fund boardroom.

As independent directors, you are the arbiters of fairness. You are in the position of being able to evaluate boardroom agenda items with a sole focus on how those matters impact fund investors, and whether a particular initiative is in the investors’ best interest.

Your role as independent directors, however, is not limited to the boardroom. Continuing education initiatives, such as this conference, are essential in helping you to hone your skills and stay abreast of regulatory developments.

For your commitment to serving fund investors should not end when the gavel falls on the last agenda item. Your responsibility to your funds’ investors requires continuing study if you’re to make good on your commitment to serve investors’ best interests. And so—and I know Chairman Cox joins me in this—I commend the Mutual Fund Directors Forum for its many efforts to help fund directors excel in their oversight role.

And if Americans are coming to you to oversee this vast amount of wealth, they come to us at the SEC to make sure that mutual funds are disclosing all they should be. That, too, is an awesome responsibility.

As you are aware, you—and we at the SEC—share a common mission: the protection of mutual fund investors. Like you, we seek to fulfill this mission with tenacity, by being a zealous advocate on behalf of investors. Of course, to be effective, we who represent investors must understand what investors need and want. We cannot rely solely on fund management to tell us.

We also cannot become complacent with the ways of the past. The mutual fund industry is constantly evolving. So we must continue to explore new methods of serving and protecting investors.

At the SEC, we value your organization’s guidance and input—especially on the issue of how we can improve mutual fund disclosures to make them more understandable, meaningful and readily available for investors. As independent directors, you have a unique perspective because you serve as the link between fund investors and fund management.

Like investors, you represent a variety of backgrounds and experiences. As a result, you can provide a fresh and insightful view on what investors need to make the most informed investment decisions. We are sincerely interested in your viewpoints and encourage you to participate with us in efforts to streamline mutual fund disclosures and expand our technological capabilities to put better fund data and information into the hands of investors.

As I’m sure you’re aware, the Commission currently requires mutual funds to disclose a wealth of information. In fact, some may even say that we have a veritable embarrassment of riches when it comes to information disclosed by mutual funds. Indeed, some people are asking whether we are demanding too much disclosure, or not prioritizing it sufficiently.

We know for example that not all of the information being disclosed is always directly useful to retail investors in the format in which it is now presented. So there is an ongoing examination of how to improve the disclosure of information at the point of sale.

The key challenge—not just for the Commission, incidentally, but for the entire industry, including directors such as you—is finding a way to make this information more readily available to retail investors—first and foremost.

There are other constituencies, to be sure. There are regulators—let’s not forget them—but there are also financial intermediaries, the financial press and third party analysts who digest the information, analyze it and provide it to retail investors in a variety of formats.

In recent years, the Commission has taken steps to address the different information needs of the various audiences requiring mutual fund information. We have, for example, required summary portfolio information to be delivered to investors, with more detailed information available on-line or on request.

But when it comes to mutual funds, the retail investor assumes the lion’s share of the focus. We should reexamine whether he or she can easily understand the vast array of information out there in the format in which it is being presented.

There are several proposals out there that we’re looking at. Without prejudging any of them, I can tell you that the Chairman supports prospectus reform that would make the information disclosed easier to use. We want average investors to understand them. The only trouble is that we all too often deal with experts. And, you know, a good definition of an expert is someone who brings confusion to simplicity.

The good news is that, today, we are on the threshold of a far better, far more comprehensive solution to the problem. I’m talking about interactive data. I want to finish my remarks with a couple of comments on this initiative, since it offers the promise of a world where all the constituents—retail investors and their intermediaries and third party analysts—can access the great wealth of mutual fund information with a few simple keystrokes.

Chairman Cox has high hopes that the use of interactive data, and of the Internet in general, can empower the average investor in the retail market. We’d like to see the democratization of financial information and analysis. And there is no better place to start than mutual funds, given their prominence as the investment vehicle of choice for the majority of investors.

Interactive data is made possible by a process known as tagging. For example, a language being written by an international consortium, Extensible Business Reporting Language, or XBRL, tags the numbers in financial statements so they can be easily identified and searched by computers.

It reduces human intervention in the research of information, thereby cutting down on instances of human error in the all-important numbers. At the same time, it enhances the ability of individuals to perform the calculations they want, to contrast and compare across industries or firms.

Through computer tagging of the data that is filed with us, we hope to make it possible for end-users to pick and choose exactly what data they want and need and to analyze and compare just that data. Call it personalized “slicing and dicing.”

The even better news is that the taxonomy development that is needed to make this a reality is well within our reach. Chairman Cox is very serious about realizing this vision. And I know Susan is committed to bringing interactive data to mutual fund filings.

But when it comes to looking after the interests of the retail investors in mutual funds—whose importance to the American economy I have laid out for you here today—we are only one piece of the puzzle. You independent directors have a huge job as well.

The magnitude of your responsibility as the watchdog on behalf of investors may, at times, seem overwhelming. However, you must never lose sight of the fact that mutual fund investors benefit from your dedicated service. And I, and my colleagues at the SEC, value the time and energy you commit to your vital role as independent overseers.

I encourage you to keep up the good work and reach out to us at the SEC with your ideas. We will be listening.

What you do is key to the well-being of the whole economy. You’re the stewards of America’s Dream Machine. I know you realize that you carry this awesome responsibility, and I want to thank you for your dedication.

And for inviting me to be here today. Thank you very much.



Modified: 02/15/2006