SEC's Chair Mary Schapiro Cozy With Wall Street? An Open Letter

Last Updated Apr 2, 2010 4:05 PM EDT

April 1, 2010

Mary L. Schapiro, Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Dear Chairman Schapiro:

Allow me to introduce myself . . . My name is Allan Roth. I am a financial planner, financial writer, finance professor and, at times, squeaky wheel investor advocate. Acting in the latter capacity, I was delighted to hear you extolling the importance of the "F" word (fiduciary) and the "D" word (disclosure) in the recent Money Magazine article, How Well is the SEC Protecting You? In the article, you noted that you didn't agree with the critics who felt "the SEC is still too cozy with Wall Street." Well, this open letter will offer you an opportunity to demonstrate that lack of coziness, by responding to an issue that didn't seem to concern the old, cozier, SEC.

During the days of the old SEC, your Director of Investment Management, Andrew Donohue, was giving speeches to mutual fund directors touting their fiduciary responsibility to shareholders over the mutual fund company, as directed in the Investment Company Act of 1940, and the need for disclosure to shareholders. He stated this disclosure included how those directors exercised their fiduciary duty in deciding to renew contracts with the mutual fund companies that managed the money. As is so often the case, the theoretical world ends up clashing with the actual one, much like Mr. Donohue's words did with the actions of the old SEC. The issue I refer to, which Mr. Donahue himself was informed of, was described in more depth in this 2005 MarketWatch column by Paul Farrell. That column detailed my efforts to get the "independent chairman" of a mutual fund, Joseph DiMartino of Dreyfus, to consider pursuing a tax-free merger of the Dreyfus S&P 500 fund (PEOPX) to a fund following the exact same index with a third of the costs. I even provided the introduction necessary to pursue this option. Doing so, of course, would have guaranteed a much higher return to the shareholders to whom DiMartino and his Board owed a fiduciary duty. There are very few guarantees in investing but pursuing this merger, or negotiating down the management fees within Dreyfus, would have provided such a guarantee.

I was quite aware that DiMartino was, and I think still is, the highest paid mutual fund director in America and that negotiating on the shareholders' behalf could jeopardize this pay. So it wasn't a surprise that he chose not to pursue this option, nor to use it as leverage to lower the Dreyfus management fees. I also wasn't surprised he, or Dreyfus, refused to disclose this material $67 million dollar fact to shareholders. I wasn't even surprised when Dreyfus offered to discuss a settlement with me in the hopes I would go far, far away. What did surprise me, however, was the fact that our financial regulator, the SEC, completely ignored my correspondence. Here was a poster-child situation on fiduciary responsibility and disclosure, or rather the lack thereof, that went against what supposedly were the core principles of the agency's stated mission, yet the disinterest was deafening. Could this be termed "cozy?" I don't know. But I do know that when the dust settled, I was on one side of the divide, and the SEC was standing with Wall Street on the other side. In retrospect, my experience was but a harbinger of events that would pave the way for the 2007 financial meltdown.

Chairman Schapiro, I applaud your words:

Don't minimize the importance of disclosure - it is the lifeblood of our financial system and allows investors to make informed decisions.
As eloquent as those words are, they still don't answer the question "How well is the SEC protecting you?" Investors will have to look to your actions for that answer. Will they prove that you are serious about the duties of fiduciaries, or will they prove that you agree with the old SEC that the interests of independent board members, and those of the mutual fund management company, can be placed above shareholder's interests? And will your actions prove that the new SEC really does believe disclosure is critical, or will they say that shareholders can remain the mushrooms that their fiduciaries keep in the dark when they have acted in such a way as to guarantee them lower returns? I hope investors will not only agree with your words, but will soon be able to also agree with your actions.

So, Chairman Schapiro, since you are the new sheriff in town, I ask you two questions:
  1. When fiduciaries have an option to guarantee higher returns for shareholders, can they turn it down?
  2. If they do turn it down, do they have an obligation to disclose it to current and potential new shareholders?
Frankly, how you answer these questions will be a good indicator of where you're actually planning to take the SEC. How you answer will reveal whether you are as truly committed to enforcing fiduciary duty and disclosure as you say you are, and whether you'll be willing to walk your talk to the extent necessary to protect the public and restore confidence in financial markets. Only time will tell if this is a new day for the SEC, or just "same thing, different day." Guess we'll have to wait and see if you'll require the fiduciaries on this Dreyfus fund's board to finally explore this merger or negotiate down fees or, at the very least, require disclosure of these critical facts to the shareholders.

Let me be clear that this letter is not only about the Dreyfus issue. This letter is about whether regulators are prepared to start regulating. This letter is about whether the SEC is prepared to start requiring fiduciaries to act as such, and whether consumers will finally get a fair shot in the world of investing.

In recent years, the stock market has taken investors on one wild roller coaster ride after another. This ride was made even more stomach-dropping by the past failures of our regulators. So, as you can imagine, we're more than a little angry and mistrustful. But hope springs eternal in the heart of American investors, and we are also hopeful as we await your response.

Sincerely,

Allan S. Roth
PEOPX Shareholder
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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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