SEC oversight of funds helps build public trust

MUTUAL FUNDS

August 08, 1993|By WERNER RENBERG

Whether it was Thomas Jefferson (as is believed by some) or another historic figure, whoever said "that government is best which governs least" would have been surprised to see leaders of the highly regulated mutual fund industry endorsing tougher government oversight.

But that's what happened recently when the Investment Company Institute and some of its largest members -- including Fidelity and Merrill Lynch -- backed the Securities and Exchange Commission's request for more money to fund inspections.

In statements to congressional committees, their executives supported authorizing the SEC to keep more of the fees collected from funds so that it can hire more inspectors.

That leaders of the $1.8 trillion industry would praise requests for more inspections isn't really surprising, though.

The public's confidence that it would be treated fairly when investing in funds has been a major contributor to industry growth.

If you buy shares directly from fund companies, you may recall how your own confidence was tested, for example, the first time you dialed an 800 number in a distant city, asked a friendly stranger to send you information and forms, mailed a check and waited for the statement confirming that your money had been invested as you wanted.

It continues to be tested as you see how funds manage your money.

Before leaving office, then-SEC Chairman Richard C. Breeden indicated that public confidence has been justified. He wrote Chairman Edward J. Markey of the House Subcommittee on Telecommunications and Finance: "The investment company industry generally has a very good track record . . . especially when compared with the scandals and illegal activities that have plagued other areas of our financial markets."

Industry executives want to maintain this record. They're backing more government oversight because they fear that the record could be tarnished -- and public confidence undermined -- by incidents of incompetence or dishonesty.

You can appreciate the role of fund inspections in reducing such risks when you understand their scope. Gene A. Gohlke, associate director of the SEC's Division of Investment Management, says they have two broad objectives: to make sure that funds comply with rules and regulations, and to make sure that funds do the things they promise investors.

Here are some examples of what inspectors look for:

* Are the securities owned by a fund consistent with its name and investment objectives?

* Does it get the best prices when it buys or sells securities?

* Are fund expenses appropriate?

* Do NAV calculations properly reflect revenues and expenses?

* Do advertising and sales promotion pieces comply with the rules? When performance data are used, are they properly calculated?

Because the SEC's resources have lagged industry growth, Breeden wrote Markey, the staff has reduced the frequency and scope of examinations to limited annual inspections of every money market fund and of at least one fund in each of the 100 largest fund families.

"Many medium-sized and smaller fund [families] have not been inspected for several years," he noted. "Even more disturbing is the fact that some newer fund [families] have never been inspected."

Even though investment companies paid $80 million in fees last year to finance the oversight program, Breeden advised Markey, SEC's budget allowed it to spend only $18 million for this purpose -- enough for only 130 full-time examiners.

Breeden's successor, Arthur Levitt, has taken up the cause.

Testifying before the Senate Subcommittee on Securities, he asked for enough money for comprehensive reviews of the 100 largest families over a two-year period, annual inspections of all money market funds, and inspections of other fund families every other year.

In response, the House Energy and Commerce Committee, parent of the Markey subcommittee, earmarked some fund fees for regulation in its SEC authorization bill. We'll know next month, after Congress returns, whether the Senate subcommittee's bill will have a similar provision.

1993 By WERNER RENBERG

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