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DECEMBER 1, 2003
Mutual Funds: A Fair Settlement The public shouting match between New York State Attorney General Eliot Spitzer and Securities & Exchange Commission Chairman William H. Donaldson over how to reform the mutual-fund industry is unseemly at best. Both are acting to protect investors from predatory practices that appear to be widespread in an industry that people trust with their savings. But political mud-slinging, turf battles, and finger-pointing only confuse a complex issue to the detriment of the people both sides claim to be helping: the investing public. It's time to calm strident voices and move on to shaping the best reform package for the industry. Spitzer deserves all the credit for blowing the whistle in the first place. As he did in the Wall Street analyst scandal, Spitzer moved before the SEC did. His investigation led the way in showing serious breaches in trading practices, governance, and the paying of fees in mutual funds. But Spitzer and Massachusetts Secretary of the Commonwealth William F. Galvin are off-base in blasting the SEC for rushing into a weak settlement with Putnam Investments. They want a public admission of guilt, specific monetary damages, and reforms that would cut fees charged on mutual funds as part of the terms. The SEC is open to criticism for being late -- again -- in protecting investor interests. And the Investment Company Institute, the mutual-fund industry trade organization, has been unduly influential in the SEC's rule-making process. The ICI has successfully lobbied to exempt portfolio managers from disclosing their compensation and was able to exempt the industry from important conflict-of-interest and disclosure rules in the 2002 Sarbanes-Oxley Act. But the SEC's settlement with Putnam is tough and opens the door for further charges and stiffer penalties. The SEC is overhauling Putnam's boards of directors, demanding more out-siders and independent chairs. It requires boards to hire compliance officers to monitor fund managers, and compliance audits will be mandatory every two years. Putnam has agreed to restore investor losses and won't contest penalties it will have to pay. True, the SEC didn't force Putnam to admit guilt when it agreed to settle the charges. But neither did Spitzer insist that Wall Street firms admit guilt in their $1.4 billion settlement. For good reason. Like it or not, securities-law transgressors pay for their sins via private suits when investors and their plaintiffs' lawyers sue for restitution. As for fees, the SEC promises another round of reforms that should increase the transparency of mutual-fund fee structures. That's not a bad day's work for Donaldson, even if the SEC action comes after the fact. But if Donaldson is angry with Spitzer's criticism, he should make the SEC more proactive. None of the dozen cases of fund abuses revealed to date came about via SEC examinations. Thank Spitzer for that. 
BW MALL
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