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Wednesday, May 19, 2004

A Matter of Trust

Reported by Sean Hanna, Editor in Chief

A matter of trust. That is the well-worn theme at this week’s General Membership Meeting of the Investment Company Institute in the nation’s capital. The more than 1450 fund industry executives have gathered at the Hilton Washington Towers -- roughly 16 percent more than a year ago -- were witnesses Wednesday morning to ICI President Matthew Fink’s final appearance at the meeting in an official capacity. Fink is stepping down as president of the trade group on June 1.

Fink reminded industry executives (and the reporters in attendance) of the industry’s fiduciary duties. Those remarks came in the form of an onstage interview with CNBC’s Tyler Mathisen rather than a formal address typically used by Fink in past years.

He also warned that well-intentioned reforms could sap the verve and vigor from what has historically been an entrepreneurial industry. Those rules -- which include increased disclosure of pay and requirements that funds reveal increased details of the operations such as how they vote proxies -- could cause an exodus of people and firms from the mutual fund industry, said Fink.

"Over time entrepreneurs will not enter the business, good managers will leave and creativity will dry up. That is my fear on some of the legislation," he predicted. He did add, though, that some of the legislation now being considered is constructive.

"There is a tendency to take ideas that in the abstract may be good and apply them only to mutual funds," he said. He worries that in the aggregate those rules accumulate and drive non-U.S. firms, small fund firms and employees out of the fund industry all together and into competing forms of money management that may not serve investors as well.

Fink went so far as to tell of a conversation he recently had with lawyers working with foreign asset managers who have decided to rethink whether they want to enter the US market in light of the increasing regulation of the industry. He also admitted that he has no studies or hard data to gauge the overall impact on the industry so far.

Those not wanting to see new rules may be heartened by Fink’s prediction that Congress will not act this year.

"Looks like there will not be new legislation -- absent a new scandal -- this year," he posited.

The best of the legislation, he said, are proposals that fund firms be required to institute and compliance system overseen by an officer who reports directly to the board. Fink noted that the ICI has long called for this type of requirement.

The worst legislation, he added, would be rules requiring independent chairs for fund boards. Such a requirement would "undermine the authority and stature of the independent directors," he said.

Fink acknowledged that new laws and regulations are needed to help heal the black eye on the industry caused by the recent market-timing and late trading scandals. He also called for the punishment of wrongdoers as another part of the solution, though, including "very harsh penalties for those who violated their fiduciary duties."

"Individuals and firms that violated the law should be barred from the business," said Fink. "Shareholders have to come first ahead of the managers."  

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