Paul Schott Stevens

With some 90 million investors and more than 44% of American households owning mutual funds, the fund industry has continued to grow significantly in spite of weathering more than a few storms in the last decade. As the industry's leading lobbying group celebrates its 50-year anniversary this week, the Investment Company Institute faces a changing regulatory landscape and increased global competition. Paul Schott Stevens, its president and chief executive, has led the Washington-based organization since 2004. Q. What are the ICI's long-term priorities? A. A first priority is promoting a sound regulatory framework for investment companies — one that protects investors, promotes competition, facilitates innovation and strikes the right balance between costs and benefits. Because a secure retirement is by far the main goal of our investors, ICI also places a very high priority on expanding the availability and encouraging widespread use of retirement plans. Finally, as Congress considers all-important changes to the tax code, we will continue to push for tax treatment that promotes long-term saving, and benefits our investors by maximizing the tax efficiency of their fund investments.
Q. What are some of the biggest challenges facing the industry today? A. One of the most significant [challenges results] from the volatility and uncertainty in the marketplace. The stock market has been on a bit of a roller coaster. The real economy has turned down. The price of gas and food is increasing. Our biggest challenge is to assist our investors to take a long-term approach to the market. They need to be highly diversified and stick with their investment. Mutual funds are likely to weather the current market conditions better than most other investments. Q. In light of what's been happening on Wall Street, are you expecting more regulation, and if so, how will that affect the fund industry? A. I think that there are a lot of lessons that will need to be internalized from what we have gone through. That includes the subprime crisis and other collateral events like the collapse of [The] Bear Stearns [Cos. Inc. of New York]. I hope it is not a knee-jerk process. A lot of careful consideration must be taken — a lot of things the market has already addressed. I don't know how much of that process will have an impact on mutual funds, as by and large, we came through all this turbulence to date pretty well. Q. What is the ICI's position on the push toward more 401(k) fee disclosure? A. Congress is working on new legislation. The Department of Labor has already adopted a set of standards, and soon they'll be proposing new regulations. The point we made over and over again is that we can do a better job at disclosure to employers and plan participants. We are looking for better disclosure across the board. We are supportive of rulemaking at the Department of Labor. And we are supportive of Congress. What we weren't able to support was a bill that was marked up by the House Education and Labor Committee [HR 3185]. There were a number of provisions to that bill that were not part of disclosure by nature. Q. What specifically did the ICI oppose? A. First, the bill was mandating that an index investment option be included in the 401(k) plan. Over 70% of plans now have an index option. There is no index fund that is right for everybody every time. It's a dangerous precedent for Congress to write prescriptions for investments for employers to make available to their workers. The second big issue had to do with what we thought was a proposal masquerading as a disclosure requirement that favored one business model over another. The retirement business has lots of participants and competitive funds. Some fund companies provide record-keeping and investment options for a single price; other companies only provide a part of that. The proposal was to have the full-service provider break out the investment services from the record-keeping services. It's like going to buy a truck or car and requiring the dealership to separately price the cost of the engine. Q. And what is the status of that bill? A. That was marked up and passed out of the committee April 16. It was not amended with those concerns in mind. The Ways and Means Committee of the House also has jurisdiction in this area. They will take up the matter in the near future. Q. Where does the Department of Labor stand on this issue? A. The Department of Labor has adopted public-disclosure requirements for the Form 5500 for 401(k) plans. They have regulations proposed. Q. What was the major concern from the ICI about the proposed disclosure? A. One major concern we had was, we didn't think employers needed disclosure about all of the service providers to a fund. A mutual fund is an investment; it's not a collection of service providers. Why require a deluge of information so much so that it would make it difficult for funds to provide an efficient investment in a 401(k)? For example, if you used 35 brokers for a fund, they would have to provide information about all of the brokerage costs that fund incurred with respect to each broker. What about consultants, law firms? It doesn't seem helpful to the employer to provide them with that information. Q. What is the status of that legislation? A. The public comment is closed. We are waiting for adoption of the public regulation. Q. Overall, how does the ICI feel about more transparency with regard to fees? A. I believe there's probably more information about mutual fund expenses and fees than any other financial product you might buy. We have no problem with fee transparency of 401(k)s or in the general retail market. But simply encouraging people to look at fees to the exclusion of other factors won't serve their interests that effectively. If you are a younger worker, for example, you really need to be exposed to a variety of investment options, both domestic and international. It may be more costly. From our perspective, fees are one part of the picture. You need to consider objectives, historic returns and its mix within a portfolio. We are in favor of better disclosure. We ought to await the outcome of the Labor Department efforts. Q. Are you suggesting that most mutual fund companies already do a good job in terms of disclosure? A. I think we can always do better. Most people say, "I don't read my prospectus." All the fee information is right in it. The funds also try to outline risk. What they can do is tell you about the risk of the fund; they cannot tell you about the risk of your portfolio. Q. What do you think of the idea of adopting a European fund model here in the United States? A. It's one of these big ideas whose time may never come. It's certainly not going to be in the immediate future, because it does involve a whole realm of considerations. Asia and Latin America will be doing a tremendous amount of fund investing in the coming years. We need to make a U.S.-registered fund available to compete on the global stage. An additional fund model would have more-favorable tax treatment. We are proposing a strong independent-oversight mechanism that would protect the interests of the investors. This would be a lengthy, protracted legislative effort. Q. How would an additional fund model make U.S. funds more competitive on a global level? A. What the U.S. tax law requires is that a mutual fund on an annual basis distributes almost all of its dividend income and realized capital gains to investors who are taxed on a current basis. Other tax regimes will essentially allow investors to roll up those gains and distributions until the time they sell the shares of the fund. E-mail Sue Asci at sasci@investmentnews.com.