CONFERENCE CALL BARBASH WARNING: TITANIC WAS BIG, TOO

Using the ill-fated Titanic to illustrate the dangers of being too big, Barry P. Barbash, director of the Securities and Exchange Commission’s investment management division, warned mutual fund executives to pay more attention to the rules of the road as the industry consolidates.

Size “gave those running the ship a false sense of security so that iceberg warnings were repeatedly ignored,” he said at the annual Mutual Funds and Investment Management Conference last week in Orlando, Fla. “While size may create business opportunities, it may also increase compliance challenges.”

The commission’s fund examination staff, he said, has begun taking a close look at whether newly merged or acquired money management companies are meeting compliance standards. The agency’s initial findings “point to a range of problems that arise when companies attempt to integrate compliance systems,” he said.

Some newly merged operations face problems due to incompatible computer systems or because of poor communication between compliance officers. Others are hampered by the geographic distance between compliance and investment officers.

wrong costs cut

“Hasty elimination of compliance departments of acquired companies – perhaps in an effort to reduce costs – in some cases appears to have reduced the overall quality of the compliance program,” he said.

The problem is worsened, he said, when a fund group becomes part of an organization that includes other financial companies. “Increasingly, fund complexes are becoming affiliated with firms with which they regularly transact business,” he said.

The SEC’s top-ranking mutual fund officer also told the 1,600 attending the conference that the commission is studying the fees mutual funds charge investors. In particular, it is looking at “trends in the overall level of fees, the way fees are assessed, and whether fees continue to reflect the existence of economies of scale that are passed along to shareholders,” h
e said.

Industry analysts have raised questions about why fund fees have not declined as the industry has grown enormously over the last several years.

“Most investors are blissfully ignorant of how much they pay funds,” said Mr. Barbash. “When economic times are good, investors are oblivious to costs. At some point, we are going to be faced with penny-pinching consumers.”

Mr. Barbash also called for increased cooperation among fund regulators throughout the world. In drafting its interpretation of the worldwide reach of the Internet, which was issued last Monday, the SEC worked closely with the International Organization of Securities Commissions, he said.

“In a global economy, international cooperation cannot be an afterthought,” Mr. Barbash said. “It has to be a prerequisite to effective regulation.”

Matthew P. Fink, president of the Investment Company Institute, which sponsored the conference with the Federal Bar Association, expressed the same sentiments during his keynote speech.

“Securities markets and regulators around the world should consider adopting practices similar to those in the U.S. and other developed markets,” Mr. Fink said. “Improving clearance and settlement systems would benefit all emerging markets and all market participants.”

competition is good

Mr. Fink criticized foreign markets that make it difficult for U.S. money managers to compete with restrictive rules and regulations or high capital requirements. “Requirements that limit competition are misguided,” he said.

In other sessions, conference attendees discussed the SEC’s recent decision to allow fund companies to issue summary prospectuses. The new document, also known as a “profile prospectus,” is intended to run anywhere from four to 10 pages in length and provide investors with key information about a fund’s performance, risks and investment objectives.

Starting June 1, fund companies may sell shares based on information provided in
the profile, although investors must receive a full prospectus when they receive confirmation of their purchase.

While companies like Fidelity Investments and Vanguard Group plan to use profiles on some funds, it’s unclear whether they will be embraced by the industry as a whole.

“Time will tell how successful the profile is,” said Henry H. Hopkins, managing director at Baltimore-based T. Rowe Price Associates Inc. He was part of a panel reviewing the SEC’s efforts to make prospectuses simpler. “We are still investigating and considering exactly how we are going to use them.”