Lieberman Says SEC Must Take More Aggressive Steps To Protect Mutual Fund Investors

WASHINGTON – Governmental Affairs Committee Ranking Member Joe Lieberman, D-Conn., Wednesday said the Securities and Exchange Commission is taking some positive steps toward protecting mutual fund investors from recently discovered industry abuses but far more aggressive action will have to be taken before the industry regains investor confidence.

“Beyond simply adopting new rules, the SEC must reconceptualize its role as a protector of the marketplace,” Lieberman said. “It should not simply address the illegal practices recently uncovered but must be bolder in its oversight of the mutual fund industry overall.”

On Tuesday, the SEC proposed some new rules and adopted others designed to prevent the late trading and market timing that have been at the heart of the recent mutual fund scandals. The rules include a firm 4 p.m. deadline for trades to be in to mutual funds in order to get that day’s prices and a requirement that all mutual funds appoint a compliance officer who reports directly to the fund’s board of directors.

Lieberman previously called for such measures to be adopted.

The SEC also indicated – in response to a November 3, 2003, letter from Lieberman to SEC Chairman William Donaldson – that it would make additional changes in how it oversees mutual funds, including inspection of e-mail traffic in its examinations of funds.

“It is hard to fathom how, in this day and age – and in light of the Wall Street analyst scandals in which e-mail played such a key role in revealing the wrongdoing – the SEC could still be conducting examinations that did not routinely look at e-mail,” Lieberman said.

Lieberman has cosponsored two Senate bills and has articulated his own ideas to comprehensively reform the mutual fund industry, including by strengthening mutual fund governance, providing investors with information on the fees they personally pay on their mutual funds, requiring mutual funds and brokerage firms to disclose more about the fees that funds pay to the brokerages to conduct trades and to promote the funds’ products, and ensuring that mutual fund advertising does not mislead investors.

In response to Lieberman’s November 3 letter, the SEC also indicated it is now undertaking a number of measures similar to those that had been recommended in the Governmental Affairs Committee staff report over a year ago.

That report, which was part of Lieberman’s investigation into the collapse of Enron, charged the system of public and private financial watchdogs, including the SEC, with “systemic and catastrophic failure” to protect investors from fraud and abuse in the face of corporate financial malfeasance.

The report specifically recommended that the SEC adopt a more sophisticated means of risk analysis to identify those players and practices who posed the greatest risk of harm to investors; that it leverage technology to manage the large amounts of data it was presented with; and that it consider random or targeted audits to identify emerging trends in how fraud is being carried out.

“It is a shame that it has taken a second set of scandals to get the SEC to take such action,” Lieberman said.