New chief of trade group talks about regulating industry, educating investors


With the mutual fund industry under heightened congressional scrutiny in 1994 because of unexpected losses from derivatives and scandals over unethical practices among portfolio managers, the industry's trade group, the Investment Company Institute, has elected a politician as its new chairman.

Jon S. Fossel, chairman and chief executive of the Oppenheimer Management Corp., was a state assemblyman in New York in the 1970s and two years ago mounted a campaign for the Republican gubernatorial nomination in New York, which he later abandoned, explaining "it dawned on me that I could ruin my life this way."

Most recently, Mr. Fossel was a member of a blue-ribbon ICI panel that earlier this year recommended a code of ethics for portfolio managers, intended to eliminate conflicts between trading for their funds andtheir own accounts.

Oppenheimer, which manages more than 50 mutual funds with combined assets of $29 billion, has already adopted the code.

In an interview last week, Mr. Fossel discussed what he hopes to accomplish in the year he will head the ICI.:

Q: Is there a political dimension to your new role?

A: Yes. This industry has precious little political clout. We're big, but there are probably 10 banks that each have political action committees bigger than our whole industry. Now the banks are tossing out proposals like, why shouldn't mutual funds be subject to the Community Reinvestment Act? My response is that's fine as long we get for our shareholders the same FDIC insurance banks have, and everybody has to recognize this isn't necessarily a good investment, and thus reduces returns. This is political action that could reduce returns for shareholders.

Q: How do you feel about Securities and Exchange Commission oversight?

A: We're probably the only trade association that has ever asked for more regulation. This industry is hugely larger and immensely more complex than it was just a few years ago. We want to be sure that the SEC, in particular, has the resources so that if there is a bad apple hidden somewhere in the barrel, they can find it. We send the SEC around $90 million a year in fees, and it sends back $30 million worth of inspection. We must make the case to Congress that it has to allocate more money to the SEC.

Q: What if Congress declines?

A: We've already had discussions about this. Maybe the industry has to take a look. Maybe within ICI, or within the National Association of Securities Dealers, we need to have a problem-identification group, one that can be looking out to the future as opposed to problems that have been created in the past.

Q: What's your chief concern about the industry's relations with its customers?

A: It's the issue of education. I'm afraid a significant portion of investors don't know what they're buying. I don't think they understand the risks or the rewards.

Q: What can you do?

A: The facts that people need to know are, by and large, there, with one exception. That is how to quantify risk. We need a better way of making that understandable. Disclosure is woefully inadequate because it's in legal mumbo jumbo. The average person cannot and does not read the prospectus. We need to say in plain English: this is what you're buying, this is what it costs, these are the managers, this is their performance.

Q: You've developed new ethical guidelines to shore up the industry's reputation. Are they being implemented?

A: We and some of the other fund companies have adopted the code of ethics developed by the blue-ribbon panel, and I will be very surprised, and disappointed, if by the end of this year just about everybody hasn't adopted these. The SEC has said there has to be prospectus disclosure. You guys will go through them all, and you'll report any funds that don't have them, and people aren't going to want to put their money in one of those, so I think the effect is that in short order everyone will adopt something close to what we've recommended.

Q: Is there anything you can do personally to ensure that they do? What kind of power do you have?

A: Moral suasion; that's really it. The chairman himself has no power at all.

Q: But is it a bully pulpit?

A: I think I can have an impact.

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