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Cox Discusses Fund Initiatives and Enforcement Policy

At the recent Mutual Fund Directors Forum, Chairman Christopher Cox discussed plans to address rule 12b-1, the mutual fund governance rule, 401(k) plans and soft dollars. Cox also talked about the SEC's policy for the enforcement staff to obtain full Commission approval before commencing settlement discussions in enforcement proceedings. The cases in which approval must be obtained are those involving monetary penalties against a company. Cox's prepared remarks are posted on the SEC's Web site.

Cox advised that no formal investigation is initiated, no case is filed and no settlement is agreed upon without Commission approval. The Commission review should guarantee fairness and "horizontal equity" in a nationwide enforcement program, he said. He believes the enforcement staff will hold the strongest negotiating position if the Commission has reviewed the range of outcomes before the settlement offers are made.

Where the need for consistency is greatest, Commission approval will be obtained before settlement discussions are commenced, he explained. When cases are settled within the range of guidance provided by the Commission, they will be eligible for summary approval through the seriatim process. In the cases involving monetary penalties against companies, Cox said the Commission is anxious to ensure that the precedents are clear, consistent and in accordance with the instructions of Congress in the Remedies Act.

The procedural change is not intended to bring about higher or lower penalties, according to Cox, but to ensure that the laws are vigorously enforced with the benefit of full Commission review. Cox added his prediction that future penalties will be higher since the staff lawyers will not have to hedge their bets out of fear the Commission will not back them up. Cox said this approach should give the enforcement staff more flexibility and better tools to do their jobs more effectively.

With respect to upcoming initiatives, Cox said there are numerous reasons to question the continuing viability of 12b-1 plans. Today's uses for the 12b-1 fees barely resemble the rule's original purpose, he said, which is why it is time for a thorough reevaluation. The original premise of the rule seems highly suspect in today's world, he added. Cox said that independent directors' decision as to whether to approve a 12b-1 plan, with payments coming out of fund assets, "has to be no" unless the existing shareholders will benefit.

Cox said the SEC intends to repropose and then finalize the mutual fund governance rule with careful adherence to the court's procedural requirements. The staff is also engaged in a broad initiative to examine the adequacy of the disclosure by mutual funds and other investment vehicles to investors in 401(k) plans. The goal is to make it easier for investors to understand the after-tax, after-inflation returns they will receive compared to an appropriate index, according to Cox.

The SEC will work with the Department of Labor to improve the disclosure, Cox said. He is confident that a great deal can be achieved in the coming months. Cox said the current arrangements for Americans preparing for retirement "fall tragically short." The staff is developing a proposal for more easy-to-understand disclosure documents.

The SEC also continues to examine the effects of soft dollars on obtaining the best execution of trades. Cox said the very concept of soft dollars may be at odds with clarity in describing fees and costs to investors. The SEC will consider whether fund boards could better assess soft dollar arrangements if better disclosure of the research and brokerage services that an adviser receives in return for a bundled commission is made mandatory.

The SEC's recent interpretive guidance on soft dollars may not be sufficient to eliminate the abuses the SEC has discovered. The release was important, according to Cox, but was not the last word on the subject.

Jacquelyn Lumb