ICI Supports Certification of Mutual Fund Financial Information

Washington, DC, October 16, 2002 - The Institute recently filed a comment letter with the SEC supporting the certification of mutual fund financial statements and other financial information in shareholder reports. A recent SEC proposal would require registered management investment companies to file certified shareholder reports with the SEC on new Form N-CSR in a recent comment letter. The Institute believes that certifying financial information will promote greater accountability, noting that certification is designed to improve the reliability and accuracy of financial statements by imposing enhanced responsibility for how they are prepared and reported. The SEC's rulemaking proposal is intended to implement the certification requirement of Section 302 in the Sarbanes-Oxley Act.

"We supported the Sarbanes-Oxley Act and continue to endorse the SEC's ongoing efforts to enhance the accuracy and integrity of the financial reporting system," Institute President Matthew P. Fink said. "The ICI supports the application of the certification requirement to mutual fund financial statements even though mutual funds are already prohibited from employing the corporate structures and engaging in the types of transactions that have led to recent accounting problems. In our letter to the SEC, we identified all of the areas where proposed mutual fund certifications could improve accountability and potentially benefit shareholders."

In addition, the SEC has requested comment on whether it should require certification of both shareholder reports containing fund financial statements and a technical regulatory filing called Form N-SAR. Unlike forms 10-K and 10-Q filed by corporations, Form N-SAR contains only limited financial information and is not sent to or relied upon by mutual fund shareholders. Requiring that Form N-SAR be certified presents a serious risk of diluting the certification requirement prescribed by Congress. As such, it fails to meet the legislation's intent of assisting investors and promoting improved financial accountability. The Institute urges that the pointless, costly, and distracting requirement of certifying Form N-SAR be replaced by the certification of fund financial statements and other financial information in shareholder reports.

The SEC rule proposal also would require funds to certify non-financial, textual information contained in shareholder reports. This information includes narratives in which a portfolio manager shares observations of economic and market conditions, descriptions of developing strategies, and assessments of factors contributing to the fund's past performance. Unlike financial information, it is inherently subjective in nature, and much of it is provided voluntarily. Because of this, the Institute believes that requiring the certification of this non-financial information will neither increase accountability nor benefit investors. Instead, it will undermine the effectiveness and meaningfulness of certification. For these reasons, the Institute recommends that the SEC apply the certification requirement exclusively to the financial portions of fund shareholder reports.