SEC's mutual fund regulator quits

Roye guided overhaul in wake of revelations

February 19, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

The nation's chief mutual fund regulator, who spearheaded an overhaul of the industry after a wave of scandals, resigned yesterday to return to the private sector.

Paul F. Roye said he will step down as head of the investment management division at the Securities and Exchange Commission next month and take some time to "decompress" before starting a job search. During the latter part of his seven-year tenure, Roye helped enact a flurry of regulations in response to mutual fund trading abuses uncovered by New York Attorney General Eliot L. Spitzer.

"When the scandal first broke, things were a little rocky for a while," said Henry H. Hopkins, chief legal officer at Baltimore's T. Rowe Price Group Inc., which has not been caught up in the allegations of abuse. "But I think the division has weathered the storm, and that's attributable to the fact that Paul is someone who can withstand the heat in the kitchen."

Roye and the SEC came under fire after Spitzer revealed in 2003 that mutual fund companies had allowed some wealthy investors to profit from short-term trading at the expense of ordinary investors. The SEC and other regulators followed with their own investigations, and the list of abuses grew.

Companies including Putnam Investments, Alliance Capital Management and Bank of America have agreed to pay more than $3 billion in penalties, and executives such as Richard Strong, who founded Strong Capital Management, have been banned from the securities business for life.

Under Roye, the SEC responded by mandating that funds have ethical standards and a chief compliance officer, and by forcing many new disclosures, including fund fees and expenses and the impact of taxes on fund performance. The agency's most controversial move was to require that funds have independent chairmen starting in 2006. The U.S. Chamber of Commerce has sued to have the rule overturned, arguing the commission over-reached its authority.

Roye has defended the rules, saying the agency is trying to head off future wrongdoing. "It was painful, and it caused a lot of attention to be focused on mutual funds, but it was necessary in light of the scandals," he said in an interview last month. Left undone are regulations that would require brokers to tell investors up front about their commissions and any conflicts as well as regulations designed to prevent the illegal practice of "late trading," when favored investors place and cancel orders after markets close, allowing them to trade on late-breaking news when other investors cannot. Roye said both rules will still be completed this year.

SEC Chairman William H. Donaldson, who has not chosen a replacement, said Roye "will leave a strong and lasting legacy."

"The choice of a successor will have a significant impact on the industry," said Mercer Bullard, president of Fund Democracy, a shareholder advocacy group. "The division is on a very clear course on a number of issues, and the question is whether his successor will continue on that path or shut down old projects."

Roye said the SEC should re-examine the framework of mutual fund disclosures to ensure that investors aren't overloaded with information. He said one idea would be to have a short-form fund prospectus for all investors, and that more inquisitive investors could request additional information or go to the company's Web site. To determine what investors want, the SEC has consulted focus groups, including two in Baltimore.

"At the commission, we have a bunch of lawyers and economists, and we look at things with a certain mind-set," Roye said. "But when you go out with regular retail investors and present our ideas to them, they have a totally different reaction."

Also during Roye's tenure, Congress boosted the SEC's budget to combat corporate wrongdoing, adding hundreds to the staff and raising salaries to retain employees who were being lured by better-paying jobs at other agencies or in the private sector. In the end, though, the salary wasn't enough to keep Roye, a lawyer by training.

"I wish it was enough, but unfortunately it wasn't," he said. "I've got kids looking to go to college, and I have to figure out how to pay for it."

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