October 16, 2002
Jonathan G. Katz
Re: File No. S7-33-02
Dear Mr. Katz:
I offer the following comments in response to the proposals of the Securities and Exchange Commission (the "Commission") in Release No. 34-46441; IC-25723 (August 30, 2002) (the "Release").
I believe that the Commission's efforts to implement the policies underlying the Sarbanes-Oxley legislation ("Sarbanes") will be welcomed by fund directors who take their responsibilities to the investing public with great seriousness and who seek to ensure that the procedural framework within which day-to-day fund operations are conducted is adequate to protect fund shareholders. At the same time, however, I believe that Sarbanes does not appropriately recognize that mutual funds are, in fact, among those very investors that the legislation was designed to protect. I therefore urge the Commission to modify its proposals in three specific respects. This will help assure that mutual funds, already injured by the financial scandals that have come to light over the past few months, are not further damaged by the legislation designed to prevent such scandals in the future.
First, I urge the Commission to schedule the effective date of its proposals in a manner that will allow fund directors to assure that the procedural safeguards envisioned by the Commission's proposals are implemented in a cost-effective manner. While procedural safeguards will likely enhance the protection of shareholder interests over the long term, the immediate impact will almost certainly be an increase in shareholder expenses, particularly for small fund groups and certainly for individual funds. This impact is exacerbated by the fact that the Commission's current initiative is only the latest in a series of legislative and regulatory requirements to which funds have had to respond quickly, and often with little time to assure that necessary procedures were implemented efficiently. I do not advocate "lowering the bar" for small fund organizations, nor do I suggest that small funds should be excepted from the regulatory requirements that have safeguarded mutual fund investors in the past. I do, however, believe that regulatory requirements must crafted so that all funds have the opportunity to comply with them in a thoughtful and cost-effective way.
Second, I urge the Commission to review its cost-benefit analysis with a view not only to the proposals set forth in the Release, but to the indirect expenses that will be experienced by smaller mutual funds as they attempt to adjust to the new market realities. These include increased costs associated with anti-money laundering procedures (whether incurred directly by funds or indirectly as service providers pass along their costs); increases in insurance premiums as carriers attempt to adjust to new risks and corresponding decreases in the availability of certain types of coverage; increased legal and accounting fees, as directors and fund management alike seek experts to guide them in handling new regulatory requirements; and increased emphasis on disaster recovery and contingency systems. Small fund directors are, in our experience, intensely aware of the importance of maintaining a reasonable expense ratio, often insisting upon expense reimbursements and fee waivers from fund advisers in order to do so. Given the current environment, however, this alternative may be simply beyond the ability of small fund sponsors to offer and, again, the burden of increased costs will go directly to the bottom line performance of individual shareholders.
Finally, I suggest that the certification requirements be modified as follows.
I appreciate the opportunity to comment on the Release and would be pleased to discuss these comments further with the Commission and its staff.
Very truly yours,
S/Laura Anne Corsell