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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at Open Securities and Exchange Commission Meeting


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

SEC Headquarters
Washington, D.C.
December 3, 2003

Good morning. This is an open meeting of the Securities and Exchange Commission. It is the first of a series of meetings, scheduled to take place within the next three months, in which the Commission will consider actions to protect mutual fund investors by strengthening and improving mutual fund regulation.

The recent spate of mutual fund scandals are deeply disturbing to me. We have seen a betrayal of individual investors, who entrusted their confidence, the fruits of their labor, their hopes and dreams for the future to this industry for safekeeping.

As I have said before, every mutual fund investor should expect, and is entitled to, honest and industrious fiduciaries who sensibly put their money to work for them in our capital markets. Investors also deserve a brokerage and mutual fund industry built on fundamentally fair and ethical legal principles. I firmly believe that the protections embodied in the comprehensive package of reforms that the Commission is set to consider will begin to address these concerns, and will go a long way toward restoring investor confidence in these important investment vehicles.

Late Trading, Market Timing, and Selective Disclosure

Specifically, today, we are considering a package of rules and rule proposals to combat the late trading, market timing, and selective disclosure abuses that have beset the mutual fund industry. On October 9, after consulting with Paul Roye, the Director of our Division of Investment Management, I outlined an aggressive regulatory agenda to address late trading and market timing abuses. I asked the Investment Management staff to submit its recommendations to the Commission by the end of November. The recommendations that the staff gave us and that we are considering today are well conceived, reflecting input both from investors and from key players in the market place. They are a testament to the staff's professionalism and responsiveness.

The Commission will be considering additional recommendations in this area in the coming months. At an open meeting on January 14, we will consider a proposal to require portfolio managers to report their personal trading in the mutual funds they manage. On February 11, we will consider additional proposals to combat market timing abuses, including a proposal that would require mutual funds to impose a mandatory redemption fee on market timers, as well as any recommendations that result from the work of the NASD's Omnibus Account Task Force.

In addition to these initiatives, which address the market timing and late trading problems directly, the Commission will be undertaking a broad spectrum of regulatory actions to address other problems that have plagued mutual funds and their shareholders.

Mutual Fund Governance

At the mid-January open meeting, I expect that the Commission will consider recommendations to enhance mutual fund governance. The staff will bring to the Commission proposals —

  • To require fund boards of directors to be led by an independent chairman;
  • To increase from one half to three-fourths, the proportion of fund directors that must be independent;
  • To provide independent directors with authority to retain staff;
  • To require boards of directors to perform an annual self-evaluation of their effectiveness, including consideration of the number of funds they oversee and the board's committee structure; and
  • To require boards to focus on and preserve documents and information that directors use to determine the reasonableness of fees relative to performance, quality of service and stated objectives.

In addition, we will consider whether to require directors to tell fund shareholders how the board determined that management fee levels were appropriate.

Enhanced Disclosure of Fund Fees & Expenses

I have also asked the staff to recommend for Commission consideration proposals to enhance disclosure about mutual fund fees and expenses. On December 17, the Commission will consider —

  • A proposal to require funds to better disclose breakpoint discount opportunities; and
  • A concept release seeking public input on disclosure of portfolio transaction costs.

On January 14, the Commission will consider —

  • A proposal for a new mutual fund confirmation statement that would spell out expressly the sales loads and other charges that investors incur when they purchase mutual funds, as well as the compensation and incentives of the selling brokers; and
  • An interpretive release that would clarify how rule 12b-1 applies to funds' use of brokerage commissions to facilitate distribution of fund shares.

In late January, the Commission will consider a final rule to require funds to disclose semi-annually the dollar amount of fees and expenses that their shareholders pay.

Clearly, we have a lot of work ahead of us. And, we are committed to working quickly and expeditiously to ensure that investors receive the added protections they need and deserve, now.


Before we turn to the items on today's agenda, I'd like to say a few words about the Commission's dedicated staff, and the importance of their work. These intelligent, committed, hardworking individuals care deeply about our country, and its investors. They have responded to criticism of this agency responsibly, with dignity and professionalism. Having come to know them over the past months, I would expect nothing less. I am proud to lead them and to share in their mission.

As we move forward in addressing the mutual fund scandals, we must all do so with an even stronger commitment to the individual investor, and with a keen eye toward continually challenging ourselves and our colleagues to go further, to ask more difficult questions, and to look around corners in search of answers that lie beyond what may seem obvious. Where we see areas in need of improvement we are addressing them. Our commitment to investors must extend to anticipating the wrongdoing that often accompanies the constant change in our marketplace and remaining at least one step ahead. The investing public deserves nothing less. I believe I speak for the Commission and its staff when I underscore our commitment to this critical mission.



Modified: 12/04/2003