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News June 13, 2005 Issue

What Exactly Does That Division Do, Anyway?

The Division of Investment Management, according to William Galvin, Secretary of the Commonwealth of Massachusetts, is "one of the weakest and most toothless divisions at the SEC."

Galvin slammed the division during his June 7 testimony before the House Subcommittee on Commercial and Administrative Law, which held a hearing to coincide with GAOís issuance of a report on the SECís oversight of the mutual fund industry.

The Division of Investment Management, said Galvin, "has not been known for aggressive examinations, and certainly not for enforcement actions." (Perhaps thatís because the division doesnít conduct exams or bring enforcement cases?)

"Iíd even call it a regulatory backwater," he added.

The state regulator also criticized the SEC as a whole. "In the past," he said, "the SEC simply didnít do its job. It dropped the ball. It ignored warning signs, and, inexplicably, didnít follow up on tips. In short, it failed to protect mutual fund investors." According to Galvin, almost every major enforcement action during the past decade was first raised by state securities regulators.

Galvin urged the SEC to be more aggressive, questioning whether the pending nomination of Rep. Christopher Cox (R-CA) signals that the era of "reform and vigorous enforcement" is over. "There is no doubt we are at a crossroad," he said.

He warned that regulators in charge of one industry tend to get "too cozy" with those they are charged with regulating. "Iíve seen how it works in the securities industry," said Galvin. "The regulators and the regulated go to each othersí conferences, usually in nice places like Palm Beach and Palm Desert." He suggested that Congress hold a future hearing on the revolving door "through which federal regulators go to find lucrative jobs on Wall Street."

Added Galvin: "Thereís a definite attitude problem existing in the mutual fund industry, in my opinion."

OCIE director Lori Richards also testified before the subcommittee, touching on the SECís efforts to oversee the fund industry, federal-state coordination, and the SECís effectiveness generally.

Of interest: Richards noted the recommendation in GAOís April 2005 report that the SEC request lists of all compliance-related reports from fund firms during exams. "The SEC is evaluating this recommendation," said Richards. She also noted GAOís recommendation that the SEC develop a plan to receive and review fundsí annual compliance reports to boards on an ongoing basis. "The staff is considering this recommendation," she said.

Richards testified that SEC examiners are "absolutely prohibited" from discussing future employment prospects with a registrant during an ongoing examination. "There are obvious conflicts of interest in that process," she noted.

Stanford Business School professor Eric Zitzewitz testified that until the SEC addresses pricing inefficiencies by issuing fair valuation guidance, the real cause of market timing will remain unremedied.