Stevens led ICI through era of turbulent policy, strong growth in mutual funds

Over the 16 years that he’s led the trade association representing mutual funds and investment firms, Paul Schott Stevens has dealt with the financial crisis, a years-long effort to raise investment advice standards and the compression of fund fees.

When Mr. Steven retires as the president and chief executive of the Investment Company Institute at the end of the year, he will leave behind an organization that is one of the most influential in shaping debates on financial services policy. Over his tenure, ICI has become a global association, with members in Europe, Asia and elsewhere around the globe.

Mr. Stevens, 67, was ICI’s general counsel from 1993 to 1997. In addition to his extensive background on financial markets issues, he served for four years at the White House and the Pentagon in senior national security roles.

“They certainly gave you tremendous insight into how government works and how policy is made,” he said of his jobs during the Reagan administration.

That experience helped him guide ICI’s efforts to present the fund industry’s positions to lawmakers and regulators as they crafted legislation and rules.

Here are edited excerpts of a conversation Mr. Stevens had with InvestmentNews.

IN: What does ICI contribute to the debate in Washington?

Paul Schott Stevens: We’ve invested in our research capability. The work that we do on fund issues, financial markets issues, retirement issues, is the bedrock of what we bring to public policymakers in the United States and elsewhere.

IN: Is there a particular ICI theme?

Stevens: The perspective we bring to our issues is that of the investor, the shareholder. That’s been a foundation for us in terms of framing our policy recommendations. Second is that we try to bring facts to the table — an understanding of the reality in the marketplace. I’ve always found in Washington that facts sometimes are in short supply. People have convictions but they don’t always have facts.

IN: Mutual funds, and especially ETFs, have experienced strong growth while you’ve led ICI. What challenges has that presented?

Stevens: We have succeeded wildly in terms of attracting investor money in the United States and as a global phenomenon. The rise of fund investors has been the most important development in the financial markets since the end of World War II. With all that success comes much more scrutiny and much greater responsibility. When regulators ask us, are we managing liquidity appropriately, are we managing leverage appropriately ... are we managing risk to the financial system, we understand these are legitimate questions to be asking an industry of our size and scope. We don’t provide the answers; we hope to help [policymakers] get to the right place for our investors and

our industry, on which so many people depend.

IN: In the last presidential election year, ICI spent $1.9 million on political contributions to members of Congress and $5 million on lobbying. What’s your return on that investment?

Stevens: This is an aspect of our engagement in Washington I think is valuable. I’m proud of the way in which we have engaged with political Washington, including transparency and our compliance with all of our ethical and other obligations in that regard. No apologies there.

IN: The Securities and Exchange Commission is targeting share-class selection and the lack of disclosure of 12b-1 fees. Does that effort concern you?

Stevens: Clearly, someone providing recommendations about share-class investments needs to take into account their customer’s interests in getting the best bargain for their investment dollar. If people aren’t doing that, advertently or inadvertently, then they’ve not been paying attention. But the reality is that if you look at our industry, the number of shares that are sold with any sort of load or 12b-1 fee is dwindling. It’s approaching zero sort of as a limit. I don’t know when it will get to zero. But it’s far, far less than it was when I became president of the institute — and that’s a reflection of the fact that the way people pay for advice is changing. It’s not embedded in the fund, it’s not embedded in the load, it’s not embedded in the 12b-1 fee. It’s a fee that’s added by the adviser to a significant degree independent of the fund. I think certain regulatory changes like Regulation Best Interest and the fiduciary duty proposals have helped to propel that change.

IN: ICI supports Regulation Best Interest, right?

Stevens: We’re generally supportive. I give [SEC Chairman Jay Clayton] and the commissioners a lot of credit for having moved forward with a proposal with all the difficulties and the fraught political environment that has surrounded this since the fiduciary duty regulation was first proposed at the Department of Labor.

IN: But didn’t ICI contribute to that fraught political environment by helping kill the DOL fiduciary rule?

Stevens: We supported the basic project that DOL had in mind. Then it morphed into something that we thought was really predicated on a misunderstanding of the marketplace. Our former chief economist … and our research people presented lots and lots of empirical evidence suggesting that the analysis that DOL was depending upon was just misplaced and incorrect. I don’t think of that as contributing to a fraught political environment. I think of it as trying to contribute factual perspectives that would make the regulatory policy better in light of the realities in the marketplace. Unfortunately, they chose to disregard that.