Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN

Tuesday, May 17, 2005

A. Yes, the annual General Membership Meeting of the Investment CompanyInstitute - three days in sunny, humid Washington D.C.

Q. Is that a really big event?

A. About 1,300 people attended, with a large number of the funds companies(and vendors to them) represented. Lipper of course had a booth anddemonstrated our software packages.

Q. So, what was the main thrust of what went on last week?

A. Well, the title of the conference was "Our Commitment: ShareholdersFirst."

Q. And did you get a strong feeling of commitment to that theme? I mean,there have been a lot of problems lately with the trading scandal, and sometrading desks front-running trades and so on.

A. Well, there were some good sessions about addressing the needs ofinvestors for creating adequate retirement assets, and some discussions ofhow to increase investor education.

Q. But I sense you were not totally impressed with the overall content?

A. I did have some concerns. For example, it was said that the recentlyproposed additional disclosures- about expense ratios and fund loads- mightcost so much to implement that they would hurt investors rather than helpthem. The ICI president said this might drive brokers to suggest thatpeople use ETFs or separately managed accounts instead. The ICI chairmansaid he thinks we "are experiencing a disclosure stampede."

Q. And you have problems with those positions?

A. Well, I agree that prospectuses have gotten very lengthy and that somepeople may turn off and not read them. But I don't think withholdingcentrally important information from people who do want it, is the answer.Someone suggested that minimum, crucial stuff might go in the prospectusand the rest would be prominently offered via the Internet.

Q. What are some of the added costs due to new compliance and disclosure?

A. One, which I personally did not see much broad need for, is that everyfund now needs to tell how it voted its shares on every ballot question atthe annual meetings of all the companies they own stock in. That isthousands of data points, all to satisfy a few investors who made a lot ofnoise about corporate governance. And a lot of time by fund company peopleto decide and document the votes. I bet 98 percent of funds investors caremainly about performance, expenses, and sticking to the declared investmentstrategy.

Q. And, how about the responses to the funds-trading scandal?

A. There are substantial costs there, as well as for complying with theU.S. Patriot Act and Sarbanes-Oxley.

Q. Such as?

A. Lots of paperwork to fill out, to guard against money laundering and soon. And detailed personal declarations by fund officers that the financialstatements and the written reports are true, otherwise carrying personalpenalties. That is good. All of that, of course, means extra fees spent forlegal advice. And we now have the Chief Compliance Officer position, andits staff at each fund company, to make sure internal controls are in placeand being followed. That is a response to the trading scandal.

Q. How much does that cost shareholders?

A. It varies a great deal, and is much more of a burden proportionally forsmall funds and with small fund families than with big ones. Some analystsincluding at Lipper believe that choices of funds will be reduced assmaller firms go out of business or merge into larger ones in response. Thecost is probably a few basis points a year against fund performance, butthere are also many new costs that the fund companies themselves mustabsorb rather than pass on and there was a lot of complaining about that.

Q. Any particular areas where there has been movement that does not helpshareholders?

A. I think that the SEC's own current back-pedaling on the reporting offund sales and redemptions via supermarkets and similar platforms isunfortunate. They consult forever on each new rule and can get talked outof some good ones if they hear enough noise.

Q. Can you explain?

A. Sure. There is a proposed regulation to make a 2% redemption chargemandatory if a fund is traded for a brief holding period. The problem comeswhen a buyer uses a fund supermarket. All the buys and sells for the dayare netted into one dollar figure and only that NET is reported to the fundcompany. The brokerage firms say it is too expensive to track and reportevery individual trade by holder name, which would allow the funds to seeif they are being timed. So the SEC is leaning towards merely saying thatthe fund boards must consider whether it is necessary for them to installredemption fees.

Q. Not sufficient?

A. Not based on history. If they decide not to, the door stays wide openfor timers. If the funds had been taking their "commitment to shareholders"extremely seriously in the late 1990s and into September 2003, the tradingscandal would have never occurred. Now they are moaning about how expensiveit may be to make sure it cannot continue or recur. Well, I believe thatinvestors in funds will want to pay a little more to be assured that suchabuses are stopped.

Q. How widespread were those trading abuses?

A. More than two-dozen firms have been named already and many have settled.Our Lipper data indicate there may be another 20 or so brands still to bebrought up, including some well-known 'household names.'

Q. Any GOOD news out of the ICI conference, Don?

A. There is widespread intention to raise investor education. The issue isnot content - many fund companies and other organizations like AAII andNAIC have great websites. The problem is getting the non-investor to thosesites, or to other sources of investment education. The ICI itself has somegreat course materials on it website, www.ICI.org. The issues are educatingpeople starting on financial literacy before they get out of high school,and getting them to do something as adults rather than hoping the problemwill go away or they can win the lottery. Only about half of householdshave any investments, and the average person retiring has only $50,000 inassets besides their house!

Q. So, the funds industry will probably do a good job on education then?

A. It is trying anyway. The question is one of near-term investment in thateducation, against long-term benefit (more assets under management). Theeasy work (setting up websites) has already been done. Now the need is morepersonnel-intensive -- getting people to come and start learning. Manypeople want answers to specific personal questions and will not learn froma web page alone.

Q. Thanks Don.

A. My pleasure, as always.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).