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Congress Tackles Fund Reform

The House may consider an overhaul as early as today. Senators demand an industry cleanup and criticize the SEC.

November 19, 2003|Jonathan Peterson | Times Staff Writer

WASHINGTON — Members of Congress on Tuesday demanded an array of reforms by the mutual fund industry, with House members planning to consider a legislative overhaul as early as today.

The Senate is not likely to embrace broad-based mutual fund reform legislation before next year. Yet actions in both houses of Congress on Tuesday underscored that a push for change is gaining momentum.

The House Committee on Financial Services announced that a bill by Rep. Richard H. Baker (R-La.) -- which had been languishing until the recent spate of revelations about abuses in the mutual fund industry -- could be approved today.

"My legislation ... will help bring the bright light of truth into fund fees, clean up the way funds are managed and eliminate the conflicts of interest and utter disregard of fiduciary duty to mutual fund investors that plague this industry," Baker said.

Originally targeted at such issues as clearer disclosure of the fees charged to fund investors, the bill will be amended to address such abuses as special treatment for some investors and investment-timing strategies that siphon profits away from long-term fund owners.

At a Senate hearing, meanwhile, lawmakers demanded Tuesday that the fund industry clean up its practices and had harsh words for the Securities and Exchange Commission, which has federal oversight responsibility for the industry. State regulators, such as New York Atty. Gen. Eliot Spitzer, have taken the lead in attacking industry practices that have hurt smaller investors.

"Despite prohibitions and warnings, these activities continued unabated because of inadequate compliance and enforcement regimes at the SEC, the mutual funds and brokers," said Sen. Richard C. Shelby (R-Ala.), chairman of the Senate Banking Committee.

Shelby later said he wanted more study before he would be ready to embrace a legislative remedy, suggesting that the Senate is not likely to approve major legislation involving mutual funds this year.

Sens. Jon Corzine (D-N.J.) and Christopher J. Dodd (D-Conn.) have written a bill that would order extensive fund reforms and increase criminal and civil penalties for certain industry abuses.

SEC Chairman William H. Donaldson, attempting to defuse some of the criticism, told senators his agency would launch a "risk management initiative" that would be designed to anticipate problems, such as the mutual fund abuses, before they got too big.

Under the plan, a new Office of Risk Assessment would gather and maintain data from a range of sources to pinpoint areas of growing concern.

"I believe this important initiative will fundamentally change the way the commission assesses risk and help us -- I hope -- head off major problems before they occur," he said.

Donaldson also said the SEC would consider new proposals to fix problems in the fund industry on Dec. 3. The proposals would ban after-the-bell trading, require that funds have strong compliance programs and mandate that fund boards have more independent directors.

The SEC plans to follow up with further proposals in January that would impose new requirements on the disclosure of fees and other costs that shareholders pay but often do not know or understand.

Also Tuesday:

* Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow expressed support for efforts "to strengthen and protect the trust in the integrity of mutual funds and to bring to justice those who have violated that trust."

In letters to Shelby and Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, the financial officials also cautioned that new rules "should be designed to provide investors with real value rather than serve mainly to increase costs and decrease returns."

* Some members of Congress urged Donaldson to make peace with Spitzer, who has been highly critical of the SEC's enforcement efforts. "There's a real urgency here," Shelby said. Donaldson, while saying he welcomed the efforts of all state regulators, insisted that it was the province of the federal SEC to make rules for the industry.

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