PALM DESERT, Calif. - Mutual funds are coming off one of their toughest years in recent memory, but you wouldn't know it from the turnout at one of the industry's premier gatherings.
Some 1,460 mutual fund executives, lawyers, and accountants convened here last week for the annual mutual fund and investment management conference sponsored by the Federal Bar Association and Commerce Clearing House Inc.
Attendance was about 250 above last year's conference, organizers of the event said. One reason may have been the shift to Palm Desert; at last year's event in Scottsdale, Ariz., a big complaint was that most hotels were too far away from the main site.
This year's event was sold out: About 120 people were placed on waiting lists, and only a handful of them could be admitted, organizers said. SEC's Barbash Lights into NASD
Sparks flew when Barry Barbash, the Securities and Exchange Commission's chief mutual fund regulator, took the stage at Monday's opening session.
Mr. Barbash, director of the SEC's division of investment management, quickly lit into the National Association of Securities Dealers. He claimed the trade group, which sets professional standards for broker-dealers, has frequently failed to keep up with changes in the industry.
"Proprietary bank mutual funds were on the scene for at least five years before the NASD took a close look at those funds," Mr. Barbash said. Yet, he added, "if anyone needs to be ahead of the curve it's the NASD."
He said the association has made some strides over the past two years, but said it should "expand its purview beyond reviewing advertising."
For one thing, Mr. Barbash said, the NASD should pay closer attention to the practice dubbed "revenue sharing - or as cynics put it, economic blackmail."
Under revenue-sharing arrangements, mutual fund management companies pay a share of their investment management fees to fund retailers.
Retailers, including brokerage firms and banks, are extracting such fees from fund companies as a cost of entry into their distribution channels, Mr. Barbash said. Retailers who participate in such arrangements typically command between 30 and 40 cents of every $100 invested in a fund, he added.
"The distributors are saying, 'Listen, we've been part of the success of your funds, and we want to share in the benefits,' " Mr. Barbash told reporters after his speech. But he questioned whether it is appropriate for fund companies to pay for access to sales channels with money that is ostensibly collected for investment management and research.
Mr. Barbash added that neither the SEC nor the NASD has a complete grasp on the extent of the practice. "We operate in a regulatory blind," he said. "We don't know what's happening in practice. We need to get a better handle on it." Shakeout Predicted
Bankers were in a distinct minority at the conference. Fewer than one- tenth of the registrants were from banks.
Some major banks with large mutual fund custody and administration businesses were out in force - among them, State Street Bank and Trust Co., Bank of Boston, Bank of New York, and Chase Manhattan Bank.
But few bank proprietary mutual fund executives were in attendance. Among those spotted were W. Christopher Maxwell, executive vice president of Keycorp's mutual fund management subsidiary, and Debra McGinty-Poteet, senior vice president of mutual funds at BankAmerica Corp.
"I was a little surprised there wasn't a larger complement of bankers and bank lawyers," said Robert M. Kurucza, a bank securities expert and partner in Washington with the law firm of Morrison & Foerster.
Bank mutual fund issues did occupy the spotlight briefly, during a 75- minute panel session on Wednesday that featured Mr. Kurucza and four other speakers.
Mr. Kurucza said 1994's market turmoil had provided "a wake-up call" for many bank mutual fund executives, and predicted that some banks that have proprietary mutual funds will exit that business over the next two years.
Nevertheless, he said, he expects "a substantial and steady increase in the number of banks looking to increase the marketing of mutual funds."
In particular, Mr. Kurucza predicted that "the mergers and acquisition end of this business will pick up very dramatically. You will see some mega-deals," comparable to last year's acquisition of Dreyfus Corp. by Mellon Bank Corp. Dismay Over Reaction
The bank panel also featured some sparring over the NASD's proposed rules for bank broker-dealers.
R. Clark Hooper, the NASD's director of advertising, expressed dismay over the banking industry's reaction to the proposed rules, which were released for public comment in December.
"By the time it went out for comment, we knew we had a hot potato," Ms. Hooper said. "I believe it has broken all records on the number of comment letters received."
But, she said, the tone of many of comment letters was disappointing. "Many of them said, 'We don't want it, we don't like it,' " Ms. Hooper said. She attributed the overwhelmingly negative response to "fear, concern, and some ignorance, perhaps."
Her fellow panelist, Barbara Worthen, general counsel of Fleet Investment Services, jumped in: "A lot of bankers saw the proposal as simply duplicative," she said. "There are also some really hot feelings about (the NASD's stance on) referral fees and the sharing of customer information."
Ms. Hooper said the NASD's stance is that its member firms cannot pay a referral fee for a continuing, regular activity to an unlicensed person, such as a teller or platform sales representative. However, she emphasized, "We in no way are trying to extend a prohibition of referral fees to the bank."
She said she expects this aspect of the proposed rule to be debated extensively by the NASD's newly formed bank broker-dealer committee, which will meet next month. "The rule is still evolving," she said. Improving Prospectuses
A recurring theme of the conference was the need for improving prospectuses - the jargon-laden legal documents that are supposed to help investors understand the operations, investment philosophies, and cost structures of the funds they buy.
Speaker after speaker said prospectus do nothing of the sort. In fact, they maintained, most investors never even read them.
"Investors want simple, clear disclosure that helps them to evaluate a fund, and compare different funds," said Matthew P. Fink, president of the Investment Company Institute. But instead, they receive "torrents of information" that are nearly impossible to sort through."
Reforming the traditional prospectus may provide only a temporary fix, Mr. Fink said. "Disclosure creep will set in, and pretty soon the simplified prospectus will become as lengthy and verbose as its predecessor."
The best hope, he said, may be to replace the full traditional prospectus with a summary or "profile" prospectus. The SEC is already developing prototypes of just such a slimmed-down prospectus, but the agency wants them to accompany, not replace, the full document.
Mr. Fink called on the SEC to authorize use of the summary prospectus "as a simple, stand-alone offering document" - and to require fund companies to provide full prospectuses only to customers who request them.
One wag offered up a tongue-in-cheek remedy: "Shouldn't the problem of a prospectus be resolved by telling people to read it, and if they cannot, to complain to their local school board?" said Stephen A. Blumenthal, finance counsel with the House Committee on Commerce.
But he continued on a serious note: "I read a lot of prospectuses, and the point is, it's close to impossible to understand them unless you do it for a living."
Kathryn Fulton, director of the office of legislative affairs at the SEC, said relief may be on the way for investors. "The whole issue of simplifying prospectuses is a very high priority for the commission," she said. "It's not something we're going to deliberate over forever."
She said the SEC will soon propose rules creating summary prospectuses. The SEC's office of consumer affairs already has done considerable research into what information investors want about mutual funds, and what they will read, she said.
But Ms. Fulton added that prospectus reform has been difficult in part because the threat of litigation hangs over fund companies. In particular, she said, as funds invest in increasingly complicated instruments, they have bulked up prospectuses with detailed explanations of their strategies.
"It's a tough balancing act to make sure companies say what they need to say not to get sued and investors get information they need to make an informed choice," Ms. Fulton said. Toomba and "Maria"
Though general sessions and panel discussions were heavily attended, most conference-goers had their afternoons free - and that meant plenty of time to romp in the California sunshine.
Indeed, recreation always has been a big draw of this conference, which has traditionally alternated between resorts in the Southwest. Much of the fun is sponsored by accounting firms, law firms, custody banks, and other companies eager to win fund companies' business.
The offerings ranged from modest jaunts, such as a hike sponsored by a law firm, to juicier junkets, such as jeep rides through the desert, afternoon passes to a spa, golf and tennis clinics, and hot-air balloon voyages.
The entertainment continued into the evenings. KPMG Peat Marwick, for instance, threw what was one of the more intimate dinners, inviting 350 guests to sup under a big tent at the Living Desert Museum.
Famed zookeeper Joan Embry turned up - with a cheetah named Toomba in tow - to deliver a lecture on wildlife preservation. And a roving tenor charmed the crowd with three Italian arias and a rendition of "Maria" from West Side Story.