SEC Scours Banks for Signs Of Fund-Related Conflicts

The Securities and Exchange Commission said it is looking for potential conflicts of interest as banks increase their role in the mutual fund industry.

"Bank regulation is traditionally more concerned with the safety and soundness of the bank rather than the interest of investors," Paul F. Roye, the SEC's director of investment management, told 2,000 mutual fund executives at the Investment Company Institute conference here.

In recent years, banks have become bigger players in the fund business and now manage nearly 17% of a $6 trillion mutual fund asset base in the United States. And the SEC has voiced concerns over potential conflicts.

For example, a bank-controlled mutual fund could buy equities in a company that has an outstanding bank loan and then use the money to repay the loan.

But the SEC is not just looking at banks, Mr. Roye said. It is important to put all financial services companies under the same regulatory scrutiny because of industry consolidation and the proposed legislation for financial modernization, he said.

"All parties that provide investment advice to mutual funds, including banks, should be subject to the same oversight, including commission inspections and examinations," Mr. Roye said.

Because more financial services companies are entering the asset management business, he added, there is a need for "functional regulation" that would level the playing field between fund companies and financial services providers, as well as protect mutual fund shareholders.

"Financial modernization legislation must adequately address these conflicts of interest," Mr. Roye said. "Public investors would be better off with no legislation, rather than legislation that fails to address these important conflicts of interest."

The issue is not a new one, but it is important, said Marianne K. Smythe, a partner at the Washington law firm of Wilmer, Cutler & Pickering and a former SEC director of investment management.

"Well-intentioned people can differ on what's appropriate," Ms. Smythe said. "Given the SEC's track record in protecting the investor, it would seem functional regulation is the appropriate way to resolve the issue."

But one bank asset management executive said compartmentalization within banks already prevents potential conflicts.

"The businesses are so segregated," said Robert L. Ash, managing director at Fleet Investment Management, which manages Boston-based Fleet Financial Group's $18 billion mutual fund group.

"If the regulators understood just how segregated some of these businesses are, there wouldn't be" a call for increased scrutiny, Mr. Ash said.

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