Criticisms of Fee Reductions in Alliance Settlement are Baseless

New York Action Is Warranted and Will Benefit Investors, CFA Analysis Shows

FOR IMMEDIATE RELEASE
December 22, 2003
Contact: Barbara Roper
(719) 543-9468

In a point-by-point analysis released today, the Consumer Federation of America concluded that criticisms leveled at New York Attorney General Eliot Spitzer's fee reduction settlement with Alliance Capital Management are without merit. Since the New York Attorney General's Office formally announced last week that it had negotiated a five-year, 20 percent management fee reduction as part of its settlement over trading abuses at Alliance, the agreement has come in for extensive criticism from Securities and Exchange Commission officials and some members of Congress.

"Both the SEC settlement and the settlement negotiated by the New York Attorney General will benefit investors," said Barbara Roper, CFA's director of investor protection. The SEC settlement provides restitution to investors hurt by the trading abuses and forces corporate governance reforms that will benefit future investors in the fund. The New York settlement adds to that by forcing down the high management costs charged by Alliance, which has been shown not to be operating in investors' best interests.

"It is a powerful combination," Roper said. "Unfortunately, instead of focusing on the benefits to investors offered by the combined settlement, some SEC officials and members of Congress have instead chosen to criticize the fee reduction agreement. In the process, they've turned an opportunity to show regulators working effectively together to benefit investors into one that has highlighted petty in-fighting. Instead of using the moment to restore investor confidence, they acted in ways that undermine it."

The chief criticisms of the fee reduction agreement are: that management fees are not relevant to the trading abuses that are the subject of the settlement; that they will benefit future investors, not those hurt by the trading abuses; that market competition, not regulators, should set fees; and that adopting industry-wide rules promoting independent boards and greater cost transparency is a better approach. "None of these criticisms stands up to closer scrutiny," Roper said.

  • High costs stem from the same cause as trading abuses - a willingness among fund managers to put their interests ahead of the interests of their shareholders. It makes perfect sense for enforcement officials who are investigating trading abuses to also look for evidence of excessive costs and to include fee reductions as part of the settlement agreement when they find them.
  • Not all shareholders harmed by trading abuses have withdrawn their money from the Alliance funds. Some may not feel able to move their money because of the tax hit they would suffer or may not know where to move their money when abuses have been shown to be so widespread. Thus, many of those who benefit from the fee reductions, like those who benefit from the SEC's corporate governance reforms, will be the same shareholders who were harmed by the trading abuses.
  • Real price competition does not exist in the mutual fund industry, at least not for the vast majority of transactions that occur through salespeople. This is because competition in the industry is dominated by competition to be sold by brokers and financial planners, not bought by investors. As a result, funds compete to offer generous compensation to salespeople in a variety ways (commissions, 12b-1 fees, directed brokerage, soft dollar arrangements, payment for shelf space) that drive costs to investors up, not down.
  • The SEC has created a false choice between fee reductions in settlements and industry-wide rules. There is no reason this has to be, or should be, an either-or proposition. Unfortunately, the proposals the SEC has so far put forward to add transparency to mutual fund costs fail every test of effective disclosure. There is no reason to believe they will bring real price competition to the mutual fund industry and thus no reason to believe they will drive down costs.

"CFA strongly supports meaningful reforms to make fund boards more independent and to bring real price competition to the mutual fund industry, but those reforms may or may not be forth-coming," Roper said. "In the meantime, we also support settlement agreements to reduce fees at fund companies where costs are high and management has abused shareholder trust.

"The SEC has a settlement it can be proud of," Roper added. "It should focus on that, instead of detracting from what the New York Attorney General was also able to achieve for investors."

The fee reduction analysis is available on the CFA website at http://www.consumerfed.org/feereductfact.pdf.

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The Consumer Federation of America is a non-profit association of 300 consumer groups that was established in 1968 to advance the consumer interest through research, education, and advocacy.