Fund Lobby Loses Clout

As a key emissary for the $7-trillion mutual fund industry, Matthew Fink wasn’t accustomed to getting a hostile reception on Capitol Hill.

Then came revelations of self-dealing, favoritism and other abuses by mutual fund firms. And during a recent Senate committee hearing, the president of the troubled industry’s lobbying group, the Investment Company Institute, was treated with anything but kid gloves.

Democratic Sen. Paul S. Sarbanes of Maryland, a grim look on his face, asked point-blank: Did Fink “feel any special or personal responsibility” for fund practices that have brought disrepute on an industry that used to brag it was scandal-free?

“I feel full responsibility,” Fink replied. “More than I can say.”

Until now, mutual funds have been mostly shielded from the reforms forced on the financial world -- thanks in large part to the efforts of the Investment Company Institute. It represents the interests of mutual fund firms, serving as the industry’s most authoritative voice on regulatory issues.

According to Capitol Hill veterans, the ICI has labored effectively behind the scenes to keep unwanted legislation off the floor of Congress, while putting its own mark on regulations that affect its members. Meanwhile, it has trumpeted the politically appealing message that funds are a safe harbor for the average investor, a place where the playing field is level.

What a difference a scandal makes. It has hurt not only the industry but also its leading voice in Washington, hammering the ICI’s prestige and eroding its ability to block impending reforms.

“There’s no question the ICI’s clout has been reduced as a result of this scandal,” said Mercer E. Bullard, a shareholder advocate and assistant professor at the University of Mississippi School of Law.

Indeed, the wave of investigations spreading through the fund industry has washed up on the doorstep of the ICI itself.

At least five of the 15 companies represented on the institute’s executive committee have been targeted by investigators. Casualties include John D. Carifa, ousted president of Alliance Capital Management; Robert H. Gordon, former president of Banc of America Capital Management; and Lawrence J. Lasser, ousted president of Putnam Investments. These executives are no longer on the group’s board, an ICI spokesman said.

In congressional testimony and interviews with The Times, ICI officials have declared shock and dismay at recent revelations and pledged support for enhanced ethical behavior.

Critics maintain that the group isn’t free of blame for today’s state of affairs. By its very success, they argue, the institute has sheltered the fund industry from the sort of tough oversight and regulation that might have prevented recent abuses. Moreover, the ICI has done little to address shareholder concerns about fee levels and the way funds’ performances and procedures are disclosed.

“ICI’s perpetuating of this myth -- that the industry could do no wrong -- has laid a lot of the groundwork for the problems they’re facing right now,” said Don Phillips, a managing director of the Morningstar investment research firm in Chicago.

The ICI leadership contends it has backed reforms that have benefited fund shareholders, such as making retirement plan contributions -- many of which are invested in mutual funds -- tax-deductible.

“We’re all in this together,” institute Chairman Paul G. Haaga Jr. said. “We don’t do well if our shareholders don’t do well. Shareholders are our friends.”

Critics, some with intimate knowledge of the industry’s inner workings, disagree.

“They have been an incredibly powerful force in lobbying for the mutual fund industry,” said John C. Bogle, a former ICI chairman and founder of the giant Vanguard Group, who has become a leading critic of the industry. “Unfortunately, they have not furthered the interests of mutual fund investors.”

The ICI hasn’t won every battle. A proposal that fund managers disclose their votes on corporate proxy questions, which reform advocates argued would provide important information to fund investors, was approved by the Securities and Exchange Commission despite the ICI’s dogged opposition.

In January, the ICI sent phone-book-sized documents to the SEC to dramatize its claim that the red-tape requirements were excessive. Soon after, the commission approved the rule but allowed funds to post their disclosures online rather than mail them to shareholders.

To the amazement of shareholder advocates, the ICI kept on fighting. It appealed directly to the White House Office of Management and Budget to overturn the rule, citing a provision of federal law designed to prevent onerous burdens of paperwork.

The OMB didn’t buy it. “You’d think we were talking about thermonuclear war,” said William Patterson, the AFL-CIO’s director of investments, who backed the proposal.

Fink, the institute president, said recently that mutual funds were concerned they had been singled out to reveal their proxy votes in a way that other large institutional investors did not have to, and that they would become targets for special interest pressure. Nonetheless, he said, “It’s been adopted. We’re going to comply with it.”

In the coming months, the ICI may have more to complain about. Lawmakers have expressed a sense of betrayal by the mutual fund industry. And the SEC, under fire for lax regulation of funds, is showing signs of taking a get-tough approach to the industry.

On Nov. 19, the House approved reforms that the institute had once said were not needed, and the SEC is expected to unveil new regulations governing mutual funds next month.

Scrambling to stay in front of the reform stampede, ICI leaders have declared their support for various of the changes under discussion, such as a 4 p.m. Eastern time deadline for mutual fund trades that is under review at the SEC.

Still, the institute vows to scrutinize all the proposals, such as any changes in the responsibilities of mutual fund board members, a matter of keen interest to ICI’s membership. Already, the institute has expressed objections to the SEC’s proposal that mutual fund boards have an independent chairman with no financial ties to that particular fund company.

Fink said the institute’s opposition had been influenced by input from independent board members who cited the benefits of having a chairman who is intimately involved in the day-to-day concerns of the industry.

Mutual fund firms with independent chairmen are no less likely to be embroiled in scandal, Haaga and Fink have testified.

The fund industry’s resistance, said one Capitol Hill source, “is out of step with the times.”

Responded Fink: “People should be skeptical of us. We’re a lobby for mutual funds and their advisors. But people should be equally skeptical of our critics.”