Fund companies hoping for breather after change at SEC

Cox appointment is seen as move toward kinder, gentler regulation

July 17, 2005|By Tom Petruno | Tom Petruno,LOS ANGELES TIMES

The pending change at the top of the Securities and Exchange Commission is raising mutual fund companies' hopes for a slowdown in new regulations - and perhaps a more forgiving view of industry practices that are under a spotlight.

That worries investor advocates, who say that the SEC has yet to deal with a number of important questions involving how funds operate and whether shareholders are treated fairly.

The $8 trillion fund industry, which has seen its once-pristine reputation tarnished by a series of scandals over the past two years, is looking to SEC Chairman-designate Christopher Cox for a timeout of sorts.

"Heavy-handed regulation had a time and place, but at some point you have to let the marketplace function," said Perrie M. Weiner, a partner in the Los Angeles office of law firm DLA Piper Rudnick Gray Cary, whose clients include fund companies.

Paul Schott Stevens, president of the Investment Company Institute in Washington, the industry's chief trade association, said the group believed "there needs to be a period of time to digest" the new rules imposed on fund firms in recent years.

Business groups, including the institute, roundly praised President Bush's choice of Cox to replace William H. Donaldson. SEC Commissioner Cynthia A. Glassman, a Republican, is serving as interim chairman until Cox is confirmed by the Senate.

Cox, a Republican congressman from Newport Beach, Calif., has long advocated a minimalist approach toward government restrictions on business.

The fund industry is hoping that plays to its favor on two levels. One is in terms of potential new regulation. The other is on the issue of SEC enforcement proceedings, and whether the agency should prosecute fund companies for certain long-standing practices that are under fire - such as so-called revenue-sharing deals with brokerages that sell funds.

In Donaldson's last open meeting as SEC chairman this month, the commission again voted 3-2 to require fund boards of directors to have independent chairmen, meaning the board chief can't have ties to the fund company. The vote came just one day after a federal court ordered the SEC to review the rule as it was passed a year ago, saying the agency needed to more thoroughly consider the costs the change would impose on the industry.

The SEC voted 3-2 a year ago to require fund boards of directors to have independent chairmen, meaning the board chief can't have ties to the fund company. The new rule was a direct response to the trading scandals that rocked the industry beginning in September 2003, when New York Attorney General Eliot Spitzer uncovered secret deals between fund companies and favored big investors to allow rapid-fire trading that harmed buy-and-hold investors.

Donaldson, a Republican, both times voted with the commission's two Democrats to approve the rule - over the objections of the panel's other two Republicans.

The quick revote aggravated some in the fund industry who believe the SEC hasn't had time to do the cost-benefit analysis the court required.

Rushing through a new version of the independent-chairman rule could trigger a backlash, driving the industry to aggressively lobby Cox for an unofficial moratorium on other new regulation, some experts said.

Cox's office in Washington said he wouldn't comment on fund issues, pending his confirmation.

Some reforms proposed in the wake of the fund trading scandal still are on the SEC's to-do list. One is whether to effectively require fund firms to set an earlier daily deadline for investors' buy and sell orders, limiting the potential for after-hours trading violations that were also uncovered by Spitzer's probe.

"There still are opportunities for abuses," said Roy Weitz, head of, an industry watchdog Web site in Los Angeles.

Another debate is over how much additional disclosure fund companies should make to investors about murkier aspects of their operations, such as the costs incurred in trading stocks. The industry has generally contended that it is overburdened with disclosure rules.

Besides expecting Cox to go slower in terms of additional regulation, many fund company lawyers are betting that he will be less willing to pursue some enforcement cases the industry has labeled unfair prosecution.

The Los Angeles Times is a Tribune Publishing newspaper.

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