Business / Corporate Governance

Corporate Governance

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Autor:  anton  05 November 2010
Tags:  Corporate,  Governance
Words: 2297   |   Pages: 10
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corporate goverance

I. Introduction

Thank you and good morning. It's a pleasure to be here with all of you today to discuss the regulation of mutual funds in the United States. In my view, the regulatory scheme governing investment companies is one of the most important areas of the U.S. securities laws. This is because of the tremendous size of the industry that it regulates and the importance of the U.S. fund industry to the financial health of millions of Americ

V. Role of SEC Offices and Divisions

My Division of the SEC, the Division of Investment Management, is responsible for administering and interpreting the provisions of the Investment Company Act. However, we are greatly assisted in efforts to protect investment company investors through the efforts of other Offices and Divisions of the SEC, particularly our Office of Compliance, Inspections and Examinations, the Office of Investor Education and Assistance, and the Division of Enforcement.

A. Office of Compliance, Inspections and Examinations

Our Office of Compliance, Inspections and Examinations conducts the SEC's examination program of investment companies and investment advisers. They conduct inspections to foster compliance with the securities laws, to detect violations of those laws, and to keep the SEC informed of developments in the investment management industry. One of the most important objectives of this program is the quick and informal correction of compliance problems. Violations that appear too serious for informal correction are referred to our Division of Enforcement.

B. Division of Enforcement

Our Division of Enforcement investigates possible violations of the securities laws and, when appropriate, recommends that the SEC file enforcement actions, either in a U.S. federal court or in an administrative proceeding. While the SEC has civil enforcement authority only, we work closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the violations warrant. SEC enforcement actions serve as a significant deterrent to those who would consider violating the securities laws, since the SEC can seek injunctions, cease and desist orders, suspension or revocation of licenses, bars from association with the industry, and monetary penalties.

C. Office of Investor Education and Assistance

Our Chairman, Arthur Levitt, firmly believes that the best defense against fraud and abusive practices is educated investors. Therefore, educational initiatives have been hallmarks of his tenure. To help educate investors about the securities markets generally, the SEC has established the Office of Investor Education and Assistance whose mission includes developing educational programs that will enable investors to better protect themselves and make wiser investment decisions. This office has produced brochures on a variety of topics and posted material on the SEC's website including materials designed to educate mutual fund investors. The SEC has also organized investor and small business town meetings where the public can address questions to the Commissioners and SEC staff.

Since this conference is focused on the internet, I should note that while the internet has brought significant benefits to investors, it has also created significant dangers for the unwary. The internet has helped bring millions of relatively novice participants to the markets, while also providing a mechanism for unscrupulous persons to defraud those participants. As of the end of this year's first quarter, the SEC has filed approximately 120 internet-related enforcement actions. Our Office of Investor Education and Assistance has responded by educating investors about the basics of sound investing so that they can navigate through the maze of information on the web.

Accordingly, through investor education, a comprehensive inspection program, prudent administration and interpretation of our securities laws and aggressive enforcement action when necessary, we have been able to maintain effective oversight of the U.S. mutual industry.

VI. Role of the Investment Company Industry

While I have described the SEC's role in protecting investment company shareholders, I would be remiss if I did not mention the important role the U.S. investment management industry plays in maintaining the confidence that U.S. investors have in the industry. The SEC working with the industry has helped keep mutual funds in the U.S. free from major scandal and contributed to the confidence that investors have in the industry. The U.S. mutual fund industry has for at least 60 years supported laws and regulations designed to protect fund investors. The industry has also supported and developed tough voluntary standards that go beyond the requirements of the law, such as the Investment Company Institute's recommended best practices on personal investing and the role of mutual fund directors.

As a regulator, I know that we cannot legislate honesty and integrity. Without the commitment of the U.S. investment management industry to the maintenance of high fiduciary standards, we would not have the sustained growth and record of integrity that the industry has experienced. I am sure that the success of the investment management industry in Europe is due, in large measure, to a similar commitment on your part.

VII. Current Initiatives and Concerns

While the basic structure of the Investment Company Act has served investors well, we at the SEC are currently in the midst of several significant initiatives designed to further its goal of investor protection, while keeping it apace with the rapid evolution of the financial products and services that the statute regulates.

The financial services industry is in the midst of a technological revolution and mutual funds are at the forefront. The SEC faces the formidable challenge of applying the existing regulatory framework that has helped ensure the integrity of the industry, while at the same time providing a regulatory scheme to keep pace with the increased competition and technological revolution underway in the securities markets. We currently are in the midst of several regulatory initiatives aimed at promoting the integrity of fund governance, enhancing and improving disclosures made to investors, and modernizing the regulatory structure to accommodate the increased competitiveness and globalization of the investment management industry.

A. Fund Governance

One of the most significant initiatives we have undertaken is in the area of fund governance. Last year the SEC issued a comprehensive package of fund governance reforms and a staff interpretive release providing guidance on specific issues relating to independent fund directors.

The rule proposal is designed to reaffirm the important role that independent directors play in protecting fund investors, strengthen their hand in dealing with fund management, reinforce their independence, and provide investors with better information to assess the independence of directors. The proposal would amend certain exemptive rules under the Investment Company Act by adding a number of conditions to the exemptive rules that any fund must meet to rely on the rules. These conditions are: (1) independent directors must constitute at least a majority of their board of directors; (2) independent directors must select and nominate other independent directors; and (3) any legal counsel for the independent directors must be an independent legal counsel.

We also have proposed a number of disclosure requirements that will enhance shareholders' ability to evaluate whether the independent directors can act as an independent, vigorous, and effective force in overseeing fund operations. These proposals would require funds to provide basic information about directors to shareholders annually so that shareholders will know the identity and experience of all directors. The proposal also would require disclosure of directors' ownership of fund shares, information about director's potential conflicts of interest, and information to shareholders on the board's role in governing the fund. By requiring funds to provide this information, the proposals will give shareholders the tools and information to determine how effectively the directors serve their interests.

B. Disclosure Initiatives

In addition to the protections that will be afforded to shareholders as a result of the independent director proposals, the SEC has issued a number of rule proposals, and is considering a number of other proposals, that further our continuing effort to improve the quality of mutual fund disclosure in order to help investors make better-informed decisions.

The SEC completed efforts to streamline and simplify mutual fund prospectus disclosure, encouraging these documents to be drafted in plain, straightforward language understandable to the average investor. In March, the SEC issued a rule proposal to improve disclosure to investors of the effect of taxes on the performance of mutual funds. Taxes in the U.S. are one of the largest costs associated with a mutual fund investment. Estimates show that over two and a half percentage points of the average U.S. stock fund's total return is lost each year to taxes, an amount significantly in excess of average expense ratios for these funds. Our proposal will help investors to understand the magnitude of tax costs and compare the impact of taxes on the performance of different funds. The proposed amendments would require mutual funds to disclose after-tax returns for 1-, 5-, and 10- year periods, based on standardized formulas comparable to the formula currently used to calculate before-tax average annual total returns. The after-tax returns would be required to be disclosed in the fund's prospectus and in the fund's annual report. The proposal also would require funds that include after-tax returns in advertisements and other sales materials to include standardized after-tax returns in those materials.

In our continuing efforts to improve disclosures to shareholders, we also are working on revisions to the shareholder report and financial statement requirements. Our goal is to make the prospectus and the shareholder reports work together to provide information that investors need, when they need it, and in a format that is useful. In a shareholder report, fund management can tell the story of what it has done for shareholders. Our goal will be to facilitate getting that information from management to the fund's shareholders.

C. Fund Advertizing

In addition to enhancing disclosures to shareholders, the SEC also is faced with the regulatory challenges of industry competitiveness, brought about by rapid technological advances and consolidation of the financial services industry. As funds face increased competition, one fear we have is that funds will respond to the competitive environment with overly aggressive advertising.

This is an area of particular concern to Chairman Levitt. He has asked the Division of Investment Management and our Office of Compliance, Inspections and Examinations to conduct a special review of fund marketing - including websites, sales literature and advertisements. The purpose of the review is to determine whether a fund's actual portfolio performance and investment strategies are consistent with its website statements, its advertising and its prospectus disclosure.

D. New Products

The industry has responded to competitive pressures and rapid technological changes by creating and marketing new types of funds. We need to ensure that the rush to develop attractive products does not come at the expense of products and services that offer investors real financial benefits and value. An area that presents a unique regulatory challenge is the evolution of exchange-traded funds. Assets in exchange traded funds listed on the American Stock Exchange, where almost all of these funds are traded, have risen from $2.4 billion three years ago to over $38 billion. These funds, with names like SPDRs, WEBs, Diamonds, and Cubes, have obtained exemptive relief from the SEC to facilitate secondary market trading in their shares. They are bought and sold throughout the day and are priced continuously, rather than once a day at 4 p.m., which is the pattern for conventional funds. Unlike mutual funds, they can be sold short. Additionally, their expense ratios are a fraction of those charged by an actively managed mutual fund.

There are many issues to consider as these products evolve. For example, we must consider whether the development of these products would encourage investors to view mutual funds as something other than long-term investments and encourage short-term trading of mutual funds. The SEC is currently considering an application that would allow an exchange-traded class of an existing index fund. So far, relief has been extended only to index funds but not to managed funds. Is there even a framework pursuant to which a managed exchange traded fund can work? And what impact, if any, would an exchange-traded class of a managed fund have on an existing non-exchange traded class?

Separately managed accounts that can be opened with as little as $100,000, have become competitive with mutual funds. Today, investment managers routinely have access to personal computers that are more powerful than the computer originally used to send men to the moon. Better software and portfolio management systems make it feasible for a manager, who in the past would only take institutional accounts with a minimum of $5 million or higher, to take on much smaller accounts, including retail accounts.

Financial advisers increasingly are attracting investors from funds by offering customized portfolios. They offer services over the Internet to enable individuals to create and manage their own portfolios or create a virtual mutual fund on-line; tailor-made portfolios that reflect the investor's risk tolerance, time horizon and tax situation. Technology has made customization on a large scale possible. From a regulatory perspective, we will have to consider the implications of these new products.

Electronic Media

Another area where there is increasing competition is in the use of electronic media. The SEC recently issued an interpretive release in an effort to clarify the application of the U.S. securities laws to electronic media. The increased use of the Internet by issuers as a means of widespread information dissemination has resulted in uncertainty about the application of the U.S. securities laws to these communications. The release builds on previous SEC interpretations and seeks to remove interpretively some of the barriers to the use of electronic media, while preserving important investor protections. The release provides guidance on the use of electronic media to deliver documents under the U.S. securities laws, addresses an issuer's liability for website content and hyperlinks and outlines basic legal principles that issuers and market intermediaries should consider in conducting online offerings. We recognize, however, that continuing guidance will be necessary in this area as use of electronic media continues to evolve.

1. Paul Roye (2000). FEFSI General Membership Meeting 2000

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