Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, April 14, 2007

Cox on Corporate Penalties; Muutal Fund Regulation

In a speech before the Mutual Fund Directors' Conference, SEC Chair Christopher Cox confirmed the SEC's new policy for settlements involving corporate penalties.  The SEC enforcement staff will be required to get approval from the Commission before beginning settlement talks.  In turn, where cases are settled within the range of guidance provided by the Commission, they will be eligible for summary approval.  Cox discounted the speculation that this would lead to lower corporate penalties.

Excerpts of his speech relating to current issues of mutual fund regulation:

Rule 12b-1 fees. The original premises of Rule 12b-1 seem highly suspect in today's world. If ever it was justified to indulge an irrebuttable presumption in favor of using fund assets to compensate brokers for sales of fund shares, that time surely has passed. Collecting an annual fee from mutual fund investors that is supposed to be used for marketing is no more consumer friendly than forcing cable TV subscribers to pay a special fee of $250 a year so the cable company can advertise HBO and Showtime to lure potential new customers.

401(k) Disclosures.  We are also in the midst of a broad initiative to examine the adequacy of investor disclosures by mutual funds and other investment vehicles in a typical 401(k) plan. With an emphasis on both the disclosures by the constituent investments in the 401(k), and the aggregate disclosures by the plan, we aim to make it far easier for busy Americans to understand the expenses they're being charged in connection with their investments, and the after-tax, after-inflation returns they're actually getting compared to an appropriate index. Even though this will require collaboration with the Department of Labor and other investment regulators, we're confident we can achieve a great deal in the coming months - and that the effort is supremely worthwhile, given what's at stake.

Soft Dollars.  The Commission is continuing to examine the potentially distortive effects that soft dollars can have on what should be the normal market incentive to seek best execution. And we're looking to ensure that when soft dollars are used to pay for research, it doesn't interfere with the full disclosure of actual management costs. In particular, the Commission will consider whether fund boards could better assess soft dollar arrangements if the Commission were to mandate better disclosure of the research and brokerage services that the adviser gets in return for a bundled commission. If directors are able to compare the broker's execution-only commission rate with its bundled rate, they could make more meaningful inquiries into the value of the additional services that the fund shareholders are getting.

See Speech by SEC Chairman:Address to the Mutual Fund Directors Forum Seventh Annual Policy Conference.

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