Mutual Fund Industry Win?

Bill Seeks to Restore Investor Confidence

Posted November 14, 2003 at 5:36pm

In what could set up a surprising, year-end win for the beleaguered mutual fund industry, House leaders are racing toward approving an industry-backed reform bill as early as Tuesday that aims to crack down on unfair trading techniques that have left a cloud over Wall Street.

Separately, Securities and Exchange Commission Chairman William Donaldson, under pressure from the industry to act quickly, plans to propose a series of regulatory changes at a Senate hearing this week that also will enjoy the backing of the mutual fund companies.

Though the Senate will not take up the reform legislation until next year, the twin moves in Washington are expected to deliver an improbable victory to the $7 trillion mutual fund industry in the closing days of the Congressional session.

Industry officials hope the moves will help restore the confidence of 95 million mutual fund investors who have soured on the industry as the scandal plays out on the front pages and national news telecasts. The officials also hope that quick action will fend off more stringent reforms down the road.

Lobbyists for the mutual fund industry credited the speedy action in Washington with the decision by most of the industry to embrace — rather than fight — reforms proposed by lawmakers and regulators.

The mutual fund industry is “committed to working with Congress and the regulators to do everything necessary and appropriate to preserve investor confidence,” said Dan Crowley, the chief government affairs officer at the Investment Company Institute, the mutual fund industry’s Washington lobbying arm.

House Speaker Dennis Hastert (R-Ill.) and a bipartisan group of lawmakers hope to push the reform bill to the House floor on Tuesday’s suspension calendar.

Financial Services Chairman Mike Oxley (R-Ohio) and ranking member Barney Frank (D-Mass.) were scrambling on Friday to put the final touches on the bill in time for the vote.

“All signs are go,” said a top House GOP staffer. “It’s more than likely that this will be done by the end of the week.”

The source said that neither Hastert nor Majority Leader Tom DeLay (R-Texas) has formally signed off on the bill yet, but there aren’t any problems expected in getting approval. “All the skids are greased,” the staffer said.

If the bill gets snagged, Hastert hopes to schedule a floor vote before Congress adjourns for the year. The legislation combines a reform bill approved by the Financial Services panel over the summer with new language from Oxley and Frank that addresses the latest round of problems in the industry.

“The easiest way to explain this is that it’s the bill that the committee passed in July plus the add-ons,” said Frank, who has been working with Reps. Richard Baker (R-La.) and Rep. Paul Kanjorski (D-Pa.) to craft the final reform package.

Capitol Hill and K Street sources say the House bill seeks to cut down on a range of unfair trading practices that led to the current market scandal.

Specifically, it will seek to impose a so-called “hard close” on late trading to prevent some investors from trading after closing and discourage “market timing” by imposing a new fee on investors who jump in and out of funds.

It also would require full disclosure of all fees and require that investors large and small have the same information about the makeup of a fund’s portfolio.

Finally, it would impose new corporate governance measures, such as requiring funds to have a written code of ethics and an in-house compliance official who reports to the fund’s directors.

ICI supports each of the provisions, though individual companies are likely to quibble with the details of certain aspects of the bill.

Most investment companies, for example, oppose a provision that would require mutual funds to have independent chairmen.

Meanwhile, Democrats hope to attach additional provisions to the legislation granting new enforcement authority over mutual funds to the SEC, but Frank said Democrats will support the bill either way.

As the House works toward passage of the bill, SEC officials are honing a similar slate of regulatory changes that will take a slightly tougher stance on the industry.

“The House position will not be as strong,” said one mutual fund lobbyist. “It’s a little different than the SEC. The SEC will be pretty tough.”

SEC officials hope to unveil the proposed rules this week at one of two Senate Banking, Housing and Urban Affairs Committee hearings on the mutual fund industry.

Like the House vote, SEC officials may postpone unveiling the plan for a few days. However, SEC Chairman Donaldson will surely be pressed about the details of the plan when he appears before the committee.

Unlike their House counterparts, Senate Banking Chairman Richard Shelby (R-Ala.) and ranking member Paul Sarbanes (D-Md.) are not expected to unveil their version of a bill or press for a vote this year.

Andrew Gray, communications director for the Senate Banking panel, said there was little chance his committee could take up a mutual-fund bill this year considering the tight adjournment schedule.

He added that the legislation is “a high priority” for next year.

Meanwhile, Democratic Sens. Jon Corzine (N.J.) and Chris Dodd (Conn.), both of whom serve on the Banking panel, are expected to introduce legislation on the topic this week.

However, lobbyists for the mutual fund industry are confident that they will receive an overwhelming vote for the House bill, a vote they believe will discourage Senators from making radical changes to their proposal.

“If you get a 400-vote margin in the House, Shelby is not going to challenge it,” claimed one lobbyist.

More likely, the House version of the bill will set a floor of minimal changes that the industry will face, which will be merged with a stronger bill from the Senate.

That is the pattern that several major financial service bills have followed in recent years.

A vote in the final days of the session would take a significant step toward the industry’s goal of reassuring investors that it is safe to put their money in accounts directed by Fidelity Investments, Charles Schwab or one of hundreds of other mutual fund companies.

“Consumer confidence is the absolute buzz word for this industry,” said an industry lobbyist. “The first thing you want to do when you are on the front page of The Wall Street Journal is do something that affects consumer confidence.”