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Thursday, January 09, 2003

Embattled, Pitt Continues to Act

by: Sean Hanna, Editor in Chief

Lame duck SEC chairman Harvey Pitt last night used the brewing storm over breakpoints as a case lesson for fund directors. Pitt made his remarks at the Watergate Hotel in Washington DC to the annual Mutual Fund Directors Forum sponsored by Northwestern University School of Law and the SEC. In his speech, he urged fund directors to do their homework.

"Part of doing your homework is keeping up with, and being responsive to, current mutual fund issues," said Pitt. He went on to call the issue of whether mutual fund investors are being charged the correct sales load on mutual fund transactions a "fundamental issue" facing directors.

"Directors of load funds should be concerned that their investors are not overcharged. To do this, I urge you to inquire into the policies and procedures concerning sales loads at each broker-dealer that sells your funds' shares. As watchdogs for fund investors, this is a critical issue deserving your time and effort," he went on.

Pitt added in a press briefing following the speech that the SEC is not yet sure of the extent of the problem surrounding breakpoints. "If it's a widespread problem, it could be a significant amount of money, we don't know enough yet."

His remarks and the following press briefing came as Pitt's influence in Washington is on the wane. A report in this morning's Washington Post includes calls by leading Congressional Democrats for Pitt to wrap up his tenure before the SEC implements more reforms.

When asked about his plans to resign by a reporter Pitt said he would not take the question and walked away.

"The fact that a guy who was . . . encouraged to resign because of lack of judgment about how to deal with this, is still acting as the chairman is not a good idea," the Washington Post quotes Rep. Barney Frank (Mass.), the ranking Democrat on the House Financial Services Committee, as saying. "It just continues to undermine confidence in the administration's commitment to Sarbanes-Oxley."

Yet, the SEC is continuing to act even with Pitt at the helm. Yesterday, the SEC's five commissioners voted 4-1 to elect Charles D. Niemeier as acting chief of the new accounting-oversight board. The identity of the lone dissenting commissioner was not revealed. The oversight board is scheduled to meet for the first time today. The SEC also released new rules permitting investment companies to engage in transactions with certain affiliates and portfolio companies without first obtaining an exemptive order yesterday morning.

Pitt told directors at the forum last night that the SEC hopes to have final rules on proxy voting disclosure for fund firms "this month." Those rules have met widespread opposition from the fund industry, but Pitt seems to regard them as a fait accompli.

"In thinking about the issues raised by this proposal, I start from the proposition that mutual fund securities are held for the benefit of the individuals who own fund shares. The voting power these securities represent carries the ability to influence the governance of US companies. Moreover, voting decisions by funds and advisers have an enormous impact on the financial well being of millions of ordinary citizen-investors," Pitt explained.

"Despite the influence this voting power can have, many mutual funds and investment advisers don't have specific policies to guide them in voting portfolio securities; those that have them rarely disclose their policies; and fewer yet enable shareholders to learn if their voting policies were in fact followed. Many wield voting power in the face of conflicts; they may cast votes furthering their own interests rather than those for whom they vote," he added

"Particularly since recent events have caused an erosion of confidence in public companies and financial institutions, I'm pleased we proposed these rules, which are premised on bedrock principles: transparency and adherence to fiduciary duties that require advisers to vote in shareholders' best interests. And that's in all of our interests," he concluded.  

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