SEC seeks closer scrutiny of mutual fund industry
The government is looking for better ways to keep an eye on the mutual fund industry. The Securities and Exchange Commission (SEC) recently suggested three potential changes in the way it oversees the nation's 1,830 mutual funds. The proposals include establishing a self-policing organization in the industry, relying more on the funds' outside accountants, and charging for SEC-conducted inspections.
All of the plans are aimed at boosting supervision of the huge mutual fund industry, which has 25 million shareholders and, as of last September, controlled $315 billion in assets. The changes are being proposed because the SEC does not have the resources to closely monitor mutual funds.
''The investment-company industry has been growing and changing pretty rapidly, and we are in a time of budgetary constraints,'' says Richard Grant, associate director of the SEC investment-management division. ''So the commission is examining alternatives to maintain the adequacy of the inspection program.''
The size of the challenge facing the SEC can be seen in the fact that it has only 45 inspectors to watch almost 2,000 funds. That means an agency inspector calls on a money-market mutual fund every two years. Other funds are visited only every five or six years.
Mr. Grant says ''some funds need inspecting more than others.'' He notes that between 400 and 500 of the funds are so-called unit-investment trusts ''that just sit there once they are sold.''
In a closed-end unit-investment trust, the mutual fund company holds a fixed portfolio that does not change until the fund is liquidated. So these funds have fewer transactions requiring supervision than those whose portfolios change frequently.
More active funds are the target of the SEC self-policing proposal. Under the plan, the SEC would rely on a self-policing body ''to do basic examination of these companies,'' Mr. Grant says.
The industry police group could suggest remedies for problems it found, but it would lack the power to penalize funds or set industry trade practices. And the commission would retain ''full power to inspect or bring enforcement actions ,'' Mr. Grant says.
Most of the time, though, the SEC would just check on the self-policing body to make sure inspections were thorough.
The industry is reacting cautiously to the self-regulation proposal. ''We have offered to work with the SEC (on self-regulation). We will honor that and see what comes of it, '' says a spokesman for the Investment Company Institute, a fund-industry trade group.
The spokesman added that final details of the plan ''are not known yet'' and, once they are known, reaction will be sought from member companies. The SEC has given interested parties 90 days to comment on its suggestions.
The mutual fund industry has two major concerns about a self-regulatory body. First, it fears double jeopardy in cases where the SEC might penalize a fund for problems uncovered by the self-policing organization. However, the SEC says it will not unnecessarily duplicate the industry's own inspections.
Mutual funds also are not eager to pick up the tab for a new regulatory organization. The SEC has tried to estimate the cost of such a group, but the projections ''are rough figures which are not public,'' Mr. Grant says.
Industry members also would end up footing the bill for the SEC's two other proposals. In one plan, outside accountants hired by mutual funds would expand their audit procedures to cover some areas normally checked by the SEC. But the SEC would retain the responsibility of looking for misconduct or breaches of fiduciary duties.
If mutual funds do not want to pay their auditors for beefed-up inspections, they may find themselves paying SEC staffers to do the job. The SEC also is proposing charging a fee for inspections in a bid to let the agency hire more inspectors. Commission members have suggested a $4,000 fee, which could make self-policing more appealing to the industry. Mr. Grant says inspection fees ''could be waived by those who elected to be inspected by'' a self-policing organization.