Party Politics Play a Minor Role at the SEC

By RUSS WILES

Jan. 25, 1993 12 AM PT

RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds.

Bill Clinton’s inauguration marks the first time in 12 years that a Democratic President has had the opportunity to influence mutual fund regulations. Yet industry sources don’t expect to see a lot of changes based on party lines.

Why not? Because politics don’t normally play a major role at the Securities and Exchange Commission, the federal agency charged with overseeing the fund business.

“The SEC will view its investor-protection mandate the same, irrespective of whether Bush or Clinton is in the White House and regardless of who’s chairman” of the SEC, says Craig Tyle, a vice president at the Investment Company Institute, a Washington-based trade group for the fund industry.

And if the SEC’s record under recent administrations offers any clues, it’s hard to label the Democratic White House years as pro-consumer or the Republican years as pro-business. If anything, the GOP era was more regulatory than laissez-faire.

Under President Jimmy Carter, the SEC significantly liberalized fund advertising rules and created 12b-1 fees, which have gained a reputation for being high on the investor-unfriendly scale. These expenses have been criticized as a hidden load or sales charge because fund companies often use them to pay brokers in small but ongoing increments.

Few funds levy maximum-allowable 8.5% loads anymore, but about half charge a 12b-1 fee of some type. A 12b-1 fee is named for a section of the SEC regulations that permits fund managers to pass on marketing costs to consumers.

Under Presidents Reagan and Bush, several SEC regulations had a marked pro-consumer tone.

In 1988, for instance, the SEC required bond and money-market funds to present their advertised yields based on a standardized formula, ending several questionable practices that had enabled some firms to tout misleadingly high yields.

That same year, the agency required funds to list most of their sales charges, expenses and costs in a standardized fee table, which must be prominently displayed in the prospectus.

In 1991, the SEC forced taxable money-market funds to follow a less risky path by requiring them to shorten their average maturities and invest a higher percentage of assets in top-quality debt instruments.

And last year, the SEC decided to limit 12b-1 fees to 0.75% of fund assets annually, down from a maximum 1.25%. A related rule will generally cap all sales charges at 7.25%. These provisions take effect in July.

Another rule taking effect in July caps combined 12b-1 fees, sales loads and redemption charges at 8.5% for the life of an investment.

Also during the Republican era, the SEC tightened the definitions of “tax free” and “no load” funds and required government-bond portfolios to make clear that there’s no federal guarantee against falling share prices.

The SEC is headed by five commissioners--all appointed by the President. Chairman Richard Breeden’s term expires in June, and one other commissioner seat is currently vacant, says John Heine, the agency’s deputy director for public affairs.

Certain other SEC staffers also are appointees, although most are career employees.

Presumably, Breeden will resign or will be replaced, subject to Senate confirmation. Some industry sources peg Consuela Washington, counsel for the House Energy and Commerce Committee, as a leading candidate for the chairman’s seat. If appointed, she would be the first black and first woman to hold that position.

Whoever ultimately heads the SEC will have to grapple with several fund-related regulatory issues. One such issue is whether “collective” funds sold by banks and insurance companies--typically as part of company retirement programs--should be put under SEC scrutiny and subjected to the disclosure and investor-protection requirements that pertain to regular mutual funds.

“There are still significant segments (of the pooled-asset business) that are completely exempt from SEC regulation,” Tyle says.