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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks Before the Mutual Fund and Investment Management Conference


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

Palm Desert, California
March 14, 2005

Good morning. Let me begin by thanking the Investment Company Institute for inviting me to speak today. This is an important gathering, where you will be discussing the most significant issues facing the mutual fund industry, and I appreciate having the opportunity to help kick off the meeting with Paul Stevens.

The naming of a new ICI president last year was, I believe, emblematic of the changes sweeping through the fund industry. Paul Stevens took the helm of the ICI during a very difficult time for the fund industry, and I believe he has shown tremendous leadership in his new position. We appreciate the thoughtful comments and input we have received from the ICI on our regulatory initiatives and, most importantly, appreciate the ICI’s desire to put the fund industry on track to place a renewed focus on fiduciary obligations and responsibilities.

We are seeing a new willingness to embrace a range of reforms – and these reforms are helping to bring new levels of integrity, and vitality, to the industry. The reforms are also providing investors with more reliable information, while addressing unresolved conflicts of interest that erode investor confidence and contribute to inefficient markets.

Given that most of you are close and keen observers of the Commission’s regulatory agenda, I will refrain from rehashing the many important reforms we have approved in the past 18 months. You’ve no doubt felt the changes in the work you do, and I hope you agree with me about their beneficial effects – for fund companies and investors alike. I prefer to spend my time today looking forward – touching on a few additional initiatives we have underway at the Commission. Before going any further, let me issue the standard disclaimer that the views I express here are my own and do not necessarily represent those of the Commission or its staff.

Starting with our reform agenda, the Commission voted March 3rd to require that fund boards consider whether to charge a redemption fee of up to two percent in order to address abusive market timing and detrimental short-term trading. We also requested comment on whether we should standardize certain conditions of these fees, in order to facilitate their imposition and collection. Our goal is to discourage abusive market timing which can have such an adverse impact on the interests of long-term investors.

We also expect to take action in the coming months on our proposal – known as the “hard 4:00 rule” – to address late trading in mutual funds. Our staff is gathering information regarding the utility of certain technological alternatives to a hard 4:00 rule that will be effective in addressing the problem of late trading, without imposing unnecessary burdens on ordinary investors. I understand that the industry has been quite helpful to the staff in analyzing the technology that’s available.

We are also working to address conflicts of interest throughout the securities industry. To that end, as you are aware, we are examining the nature of the conflicts that can arise from money managers’ use of soft dollars to purchase research and other products and services. A Chairman’s Task Force is reviewing the use of soft dollars, the impact of soft dollars on our nation’s securities markets, and how soft dollars impact the interests of investors. In addition, the Task Force is reviewing whether we can improve disclosure to better inform investors and fund directors about the use of soft dollars, and the benefits received.

Another issue under review is potential revisions to rule 12b-1. When the Commission proposed its ban on directing brokerage for distribution, it also requested comment regarding reforms to, or even elimination of, rule 12b-1. The Commission has received more than 2,000 comment letters – including letters from the ICI and many of you seated here today – and we will also be receiving recommendations from the NASD’s Mutual Fund Task Force. We welcome your input as the Commission considers this important issue.

The final agenda item I’d like to mention is mutual fund disclosure reform. As part of the Commission’s ongoing point of sale initiative, we have received helpful input from commenters, including investor focus groups. They have delivered one unmistakable message: investors want straightforward, simple disclosure about their mutual fund investments. We continue to search for the best method of informing investors about broker conflicts and compensation. Ideally, we’d like to minimize the costs to the broker-dealer and fund industries, and at the same time not force the delivery of so much information to investors that they end up ignoring the most important parts of it. These should not be irreconcilable goals.

We will strive to use input from the actual consumers of disclosure to fashion a mutual fund disclosure regime that better serves the needs of fund investors. As an initial matter, I expect that we will complete our point of sale initiative. We will also take up an initiative to better inform investors about mutual fund transaction costs, because in many cases investors do not understand how the costs associated with the purchase and sale of a mutual fund’s portfolio securities affect their bottom-line investment in the fund. I expect the Commission to issue a proposal to enhance disclosure of mutual fund transaction costs later this year.

From a broader perspective, I have asked the staff to carry out a top-to-bottom review of the mutual fund disclosure regime and how we can maximize its effectiveness on behalf of fund investors. Few would disagree that many mutual fund disclosure documents are too long and complicated. Investors need disclosure that is clear, understandable, and in a usable format in order to make informed investment decisions.

Investors also need information that is timely. In this regard, we need to examine ways that we can make better use of technology, including the Internet, in our disclosure regime. No good idea will be off the table – and we welcome and encourage your input. You possess an understanding of the industry’s intricacies, and you will surely have ideas about needed reforms – especially how to improve disclosure. I hope you will be active participants in the mutual fund disclosure reform process, and we look forward to working with you on this critical initiative.

Fundamental to all of these proposed reforms, and those already approved, is, of course, ensuring that mutual fund companies comply with the reforms. To that end I would like to take this opportunity to reinforce that we at the Commission are committed to providing assistance to chief compliance officers. The CCO, along with other senior managers of fund firms, is critical in the success of any fund’s compliance program. The CCO guides, leads, and implements the firm’s overall compliance program. Most importantly, fund CCOs are the eyes and ears of the board on matters of compliance. We view CCOs as our allies in our parallel mission to protect investors, so we want to assist CCOs to fulfill their function. To help do so, I am pleased to announce the development of a “CCO Outreach” program that will enable the Commission and its staff to better communicate and coordinate with CCOs.

This program will feature a number of elements. First, our examination staff will host Regional Seminars at which CCOs can learn some of the “nuts and bolts” of the examination process and about the Commission staff and resources available to them, and also become familiar with the basics of the SEC examination process. We expect these Regional Seminars to be in the late spring and early summer.

The Regional Seminars will serve as a lead-up to our first CCO National Seminar, which will be held at the new SEC headquarters in early fall. This seminar, which I hope will become an annual event, will feature presentations by SEC staff who will be responding to the many questions and concerns that I expect to surface at the Regional Seminars, and elsewhere. We anticipate that the Annual Seminar will accommodate approximately 500 CCOs in person and will also be webcast.

In addition to the National and Regional Seminars, the staff plans to issue a periodic newsletter, the “CCO Observer,” which will serve to communicate directly with CCOs about issues of interest – including new rules, interpretive releases, recent examination findings, relevant enforcement actions and more. As part of the CCO Outreach program, we will be communicating with CCOs about emerging issues – such as e-mailing “compliance alerts” to CCOs to inform them of matters that may require urgent attention. The newsletter will be written in a “plain English” format that is both usable and accessible, and will contain electronic links to relevant materials on the SEC’s website.

We are hopeful that this greater communication between the SEC and CCOs will be in both directions – that CCOs will not just hear from us, but that we will hear from CCOs about emerging issues and questions. In addition, we have established an Exam HotLine that CCOs can call if they have a complaint or a concern about an SEC examination. The calls will be fielded by senior attorneys from our examination program’s chief counsel’s office.

Let me say a word, however, about what the CCO Outreach program is not. It is not an effort by the Commission to re-write the fund’s reporting structure – fund CCOs continue to report to the fund’s board. It also is not an effort to “deputize” CCOs as agents of the SEC. Instead, it is an effort to communicate with CCOs, answer their questions, and give them the information and support they need from the Commission to perform their critical oversight function. I truly believe this is deserving of the Commission’s time, attention, and resources.

It is my hope that, taken together, these outreach efforts will form a strong and supportive program that benefits CCOs and assists them with their critical duties.

The reforms I have just laid out, coupled with our CCO Outreach program, will help to strengthen the mutual fund industry, and to restore the confidence of mutual fund investors. By the same token, these reforms are only half the answer. The other half of the equation is you. You must embrace not only the letter of the law, but also its spirit. I fully agree with Paul Stevens, who wrote in The Wall Street Journal last year, that the answer to addressing the mutual fund scandals “does not lie in any statute or rule, compliance guide, or policies and procedures -- however important these may be -- [t]he answer resides in the strength of [fund] firms’ fiduciary cultures, of [their] commitment to ethical practices, and to serving the interests of fund shareholders.”

I applaud the efforts of groups, such as ICI’s Independent Directors Council, that are developing guidance on the implementation of our reform rules. The reports the IDC has produced on the independent chair and board self-assessment provisions of our exemptive rules have been particularly helpful to fund boards who are implementing these new requirements.

Your industry, like much of American business, is defined by its dynamism and frequent change – new products, new systems, and vigorous competition. Business practices will frequently outpace any government regulator’s ability to develop specific rules governing these practices. But the quick pace of change should not rob you of the ability to act in a manner that applies well-established principles to new situations as they develop. And, if you find yourself in uncharted territory, you always have the option of consulting the SEC for guidance on how best to proceed.

An important part of your role is to apply your judgment to new situations as they evolve. You will see them before we do. And you have the ability to address questions and issues before they erupt into quagmires. Indeed, it is in your interest – and that of your employer – to prevent these issues from becoming our problems. You should always be looking to identify today’s issues and prevent them from blossoming into tomorrow's scandals.

As just a single example, last year we took a modest step in requiring the registration of hedge fund advisers. Those of you who advise hedge funds have a particularly good opportunity to help your clients by promoting their ethical business behavior.

Similarly, think how much anguish could have been avoided if a few independent or affiliated advisors from the legal, accounting, or management consulting professions had pointed out to their hedge-fund clients that late trading of mutual fund shares is illegal, as are duplicitous market timing and quid pro quo “sticky asset” arrangements. That sort of common-sense advice would have been more effective in keeping the client out of trouble than engaging in rhetorical somersaults to justify the activities the client wanted to pursue.

I hope you all will do your best to explain – and live up to – the principles behind our rules. Similarly, I hope you will not expend significant time, money, and energy devising structures aimed at evading requirements and trying to achieve a result that is “better” only because it achieves technical compliance with a rule while artfully dodging the rule’s purpose.

I also hope you will focus attention on identifying what we sometimes call “appearance” problems, which refer to those potential but as-yet-undeveloped issues, such as new business relationships or revenue streams that could create conflicts with the best interests of funds and their investors. You can help to integrate compliance and ethics into discussions about new products and new business ventures, and address in real time the risks they may present.

The animating idea is that an ethical culture must be at the core of every fund management firm, and every employee should understand the firm’s commitment to ethics, and be reminded of it on a regular basis.


It would probably be an understatement to say that the past 18 months have been something of a whirlwind for all of you in the fund industry, and for those of us at the Commission who focus on fund regulation. But out of the turmoil I believe have come some good results. We have enacted reforms that address many of the problems that were plaguing the industry. And I believe there is a recognition, present at all levels of the fund industry, that the abuses and questionable practices of the past must not be repeated. This counts as real progress, and our challenge now is to continue building on that progress.

That said, I recognize that with change comes anxiety, and perhaps a sense of being overwhelmed by new demands. Let me assure you that the Commission stands ready to assist you during the period ahead. It is certainly in our interest, and the interest of fund investors, to ensure that the new rules are implemented both quickly and correctly. To that end, we want to work with you, and answer your questions, as the implementation process continues. Indeed, gatherings like this one are an important part of the dialogue that must continue between SEC professionals and your members. I want to thank the Investment Company Institute for sponsoring this event, and others like it, and look forward to continuing our constructive working relationship for the benefit of the industry, the Commission, and, most importantly, the investing public.

Thank you.



Modified: 03/14/2005