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May 24, 2004 at 08:00 PM
After a year of uncovering some of the worst mutual fund scandals, Paul Roye, the SEC’s director of investment management, told mutual funds May 20 that the industry is now at a “crossroads,” and that it’s up to all mutual fund companies to “rekindle the [industry's] reputation of integrity.”
The scandals “reveal a need to reform the fund industry and hopefully reorient its focus on integrity and investment stewardship,” Roye told attendees at the Investment Company Institute’s annual meeting in Washington. While it took only 25 firms to ruin the entire industry’s reputation, he said, it’s time for the industry to “sink or swim together.” Roye told fund companies that it’s time to examine their “moral DNA,” and that true reform cannot come from SEC regulation and legislation alone. The industry must reestablish a culture of fiduciary responsibility, he said.
If any meaningful change in the industry is going to take place, Roye said, the “spirit of reform must be embraced from the top.” It’s up to management executives, fund directors, and heads of trade associations to steer the industry toward reform, he said.
Investors rightfully feel betrayed by the fund executives who struck “secret deals” favoring certain customers at the expense of average shareholders, Roye said. But he wonders whether the industry “will learn from its past mistakes and take serious steps” to regain its credibility. Will the industry blow “hot air” and get “back to business as usual” without taking any real steps toward reform?” he wondered.
Roye said he has noticed signs already that some in the industry are trying to avoid reform. For instance, he said, some fund groups have “resisted, whined, and complained” about funds’ obligation to fair value their securities, as set out in the Investment Company Act. Firms that failed to do this, he said, did not protect their investors from market timers. Firms complained that there is a lack of guidance by the SEC on fair valuing of securities, so the SEC asked for comments on what types of guidance was needed. The SEC “has received little help,” Roye said, “leading some of us [at the SEC] to wonder whether the complaints were really just an excuse for avoiding responsibility for employing effective fair valuation policies.”
