"In order to restore public trust and confidence in mutual funds and their distributors, the interests of investors must come first," Marc E. Lackritz said in a statement prepared for delivery today before the Senate Governmental Affairs Subcommittee on Financial Management, the Budget, and International Security.
"Investors must be assured that fraud, self-dealing, and dishonesty will not be tolerated. Investors should be treated fairly, and should be given complete, clear, and useful information about the funds they buy. All aspects of the mutual-fund business - including fund fee structures, financial incentives offered to intermediaries, fund investment and redemption policies, and fund governance - must be as transparent as possible. And, all investors should be assured of prompt execution and fair pricing of their mutual-fund transactions."
For the full testimony, click here In November 2003, Lackritz made similar points in testimony before the Senate Committee on Banking, Housing, and Urban Affairs. (http://www.sia.com/testimony/html/mlackritz11-18-03.html)
Lackritz today stressed the importance of "swift, sure, and tough enforcement actions" as proper remedies for violations of the law, and emphasized the industry's support of federal agencies, self-regulatory organizations, and state law-enforcement authorities in stopping "wrongdoers in their tracks."
But, another prong in the effort to restore the public's trust must be reforms that improve disclosures and change sales and trading practices to ensure that investors' interests are the top priority.
Improved Disclosure Of Revenue-Sharing Arrangements, Operating Expenses
After noting that "revenue-sharing arrangements" (a fund adviser or distributor pays additional compensation to a broker-dealer or other intermediary selling those funds) have helped to improve the broker-dealer services to clients by reimbursing intermediaries for services involved in processing transactions and maintaining customer accounts, Lackritz said the industry supported improvements in the disclosures about these relationships.
Operating expenses, Lackritz said, should equally be disclosed fully and clearly given that these fees have a significant effect on a mutual fund's return. The industry supports providing expense information based on a hypothetical $1,000 investment with respect to both a particular fund's return and a hypothetical five-percent return.
"Improved disclosure should provide investors with timely, clear information in a useful format so that they can make informed investment decisions," Lackritz said. "This would foster fierce competition, which affords investors broader investment choices at the lowest possible cost."
Improved disclosures about "soft dollars" (arrangements in which the broker-dealer handling transactions for a fund may use some of the commissions it earns on such trades to pay for "research-related" services), Lackritz said, are equally important, as are enforcement actions to curb soft-dollar abuses.
"Soft dollars are pro-investor and pro-competitive because they increase competition among money managers, encourage independent research, and give investors more choices," he said.
Reforms Needed To Prevent 'Late Trading' But Not Harm Investors' Opportunities To Make Transactions
While Lackritz noted that "reforms should make late trading virtually impossible," he stressed the importance of crafting preventative measures that do not severely limit the time that investors have during a trading day to buy or sell mutual-fund shares.
SIA, he said, supported a "hard close" at 4:00 p.m. E.S.T. at the broker-dealer or other intermediary level. But recipients of these orders must have electronic order-capture systems with verifiable order entry time aligned with an atomic clock to document receipt. "Late trading has had a terribly corrosive effect on investor confidence. We must find and implement an effective remedy now."
