Mr. Speaker, as a cosponsor of this legislation I am pleased to rise in support of it, but I regret that it did not include the SEC recommendations that the Democrats supported. Since the demise of Enron 2 years ago, the Committee on…
Mr. Speaker, as a cosponsor of this legislation I am pleased to rise in support of it, but I regret that it did not include the SEC recommendations that the Democrats supported.
Since the demise of Enron 2 years ago, the Committee on Financial Services has undertaken a comprehensive reform agenda. We have rewritten the rules applying to the accounting industry and completely changed the relationship between boards of directors and corporate managers.
The legislation we are considering today represents the beginning of similar reforms for the mutual funds industry. This legislation attacks conflicts of interest and increases the independence and accountability of oversight boards. It increases the number of independent board members from 40 percent to two-thirds. With increased independence, also comes increased responsibility as the legislation places fiduciary duties on boards of directors, requiring them to review revenue sharing and soft dollar arrangements.
It will also require disclosure of fund managers' compensation structure and bar the same individual from managing a mutual fund and hedge fund. On the consumer side, the bill requires the disclosure of total fees an investor will pay per $1,000 they invest.
Finally, I am pleased that this legislation provides the SEC more authority to police the funds industry. I can only hope that they use it. I would also like to commend the leadership of State regulators and State attorneys general, specifically Mr. Elliot Spitzer from New York State. The following is an article he recently authored and published on this subject:
[From the New York Times, Nov. 17, 2003]
Regulation Begins at Home
(By Eliot Spitzer)
Albany--With two decisions in the last two weeks, the Bush
administration has sent its clearest message yet that it
values corporate interests over the interests of the average
Americans. In the Securities and Exchange Commission's
settlement with Putnam Investments, the public comes away
short-changed. In the Environmental Protection Agency's
decision to forgo enforcement of the Clean Air Act, the
public comes away completely empty-handed.
The 95 million Americans who invest in mutual funds paid
more than $70 billion in fees in 2002. These fees went to an
industry that did not take seriously its responsibility to
safeguard investors' money. Investors are now rightly
concerned about whether those mutual funds that breached
their fiduciary duties will be required to refund the
exorbitant fees they took, and what mechanism will be put in
place to ensure that the fees charged in the future are fair.
Unfortunately, the S.E.C.'s deal with Putnam does not
provide a satisfactory answer to these questions. Instead, it
raises new questions.
The commission's first failure is one of oversight. The
mutual fund investigation began when an informant approached
our office with evidence of illegal trading practices.
Tipsters also approached the commission, which is supposed to
be the nation's primary securities markets regulator, but the
commission simply did not act on the information.
The commission's second failure was acting in haste to
settle with Putnam even though the investigation is barely 10
weeks old and is yielding new and important information each
day. Whether the commission recognizes it or not, the first
settlement in a complex investigation always sets the tone
for what follows. In this case, the bar is set too low.
The Putnam agreement does contain a useful provision
mandating that the funds' board of directors be more
independent of the management companies that run its day-to-
day operations. It also talks of fines and restitution, but
leaves for another day the determination of the amount Putnam
should pay.
Most important, the agreement does not address the manner
in which the fees charged to investors are calculated. Nor
does it require the fund to inform investors exactly how much
they are being charged--or even provide a structure that will
create market pressure to reduce those fees. Finally, there
is no discussion of civil or criminal sanctions for the
managers who acted improperly by engaging in or permitting
market timing and late trading.
S.E.C. officials are now saying that they may be interested
in additional reforms. But by settling so quickly, they have
lost leverage in obtaining further measures to protect
investors. After reviewing this agreement, I can say with
certainty that any resolution with my office will require
concessions from the industry that go far beyond what the
commission obtained from Putnam.
It is not surprising that the commission would sanction a
deal that ignores consumers and is unsatisfactory to state
regulators. Just look at the Bush administration's decision
to abandon pending enforcement actions and investigations of
Clear Air Act violations.
Even supporters of the Bush administration's environmental
policy were stunned when the E.P.A. announced that it was
closing pending investigations into more than 100 power
plants and factories for violating the Clean Air Act--and
dropping 13 cases in which it had already made a
determination that the law had been violated.
Regulators may disagree about what our environmental laws
should look like. But we should all be able to agree that
companies that violated then-existing pollution laws should
be punished.
Those environmental laws were enacted to protect a public
that was concerned about its health and safety. By letting
companies that violated the Clean Air Act off the hook, the
Environmental Protection Agency has effectively issued an
industry-wide pardon. This will only embolden polluters to
continue practices that harm the environment.
My office had worked with the agency to investigate
polluters, and will continue to do so when possible. But
today a bipartisan coalition of 14 state attorneys general
will sue the agency to halt the implementation of weaker
standards. In addition, we will continue to press the
lawsuits that have been filed. We have also requested the
E.P.A. records for the cases that have been dropped, and will
file lawsuits if they are warranted by the facts.
Similarly, my office--while committed to working with the
Security and Exchange Commission in our investigation of the
mutual fund industry--will not be party to settlements that
fail to protect the interests of investors and let the
industry off with little more than a slap on the wrist.
The public expects and deserves the protection that
effective government oversight provides. Until the Bush
administration shows it is willing to do the job, however, it
appears the public will have to rely on state regulators and
lawmakers to protect its interests.