Keeping an Eye on the Funds
Low-key congressman watches out for `the investor class'
Richard Baker is not the most obvious candidate for the role of mutual fund watchdog in Congress.
First, he's a very conservative, nonheadline-seeking Republican House member, who wouldn't appear to be eager to make trouble for big business. (The U.S. Chamber of Commerce gives him a rating of 95 percent for his pro-business votes.) His east-central Louisiana district surrounding the state capital Baton Rouge is a world away from the caverns of Wall Street. He's a staunch free-marketer and, though a real-estate broker before joining the Louisiana Legislature and coming to Congress in 1987, his modest background didn't prepare him to take on giants of finance.
Yet Baker, the leading congressional advocate for tougher regulation of mutual funds, views his position as a natural one, even an ethical one for the son of a Methodist preacher. His populist role, meanwhile, sits well with the Louisiana political tradition. "It is unfortunate that Republicans are characterized as being for big business no matter what," says the nine-term congressman. "It's pretty simple: Some of these companies are abusing their privileges. And the investor class has grown; it's people in my district, in all our districts. This is no longer just a few rich people throwing money at Wall Street."
Elected to the Louisiana state Legislature at 23, Baker began his career as a Democrat, switching parties in 1985 when GOP leaders asked him to run for a House seat that became vacant when the congressman ran for the Senate. When the Republicans won control of the House of Representatives in 1994, Baker became chair of the House subcommittee overseeing financial markets. In recent years, he has championed fairly tame legislation to combat corporate fraud and toughen regulation of investment banking practices following the Enron scandal. And he has, with little success, sought stronger oversight of powerful mortgage financiers Fannie Mae and Freddie Mac.
But in recent months, it has been the trading scandals of the $7 trillion mutual fund industry that led Baker to call for a more active federal role in regulating the nation's financial markets. Last June, Baker introduced legislation seeking greater disclosure of mutual fund fees. He didn't get far. That changed last fall, after the scandals became public and the House in November passed--by a vote of 418 to 2--his bill intended to crack down on abusive trading practices and limit conflicts of interest by fund managers. The Senate is expected to address the matter this year.
Political element. Even in this election cycle, Baker predicts some legislation will pass, especially if the allegations of fund abuses deepen. Others on the Hill seem less sure, saying the recent market run-up has taken some of the sting out of the abuses, which largely involved institutional investors. And they note the lack of public outrage that led to the Sarbanes-Oxley corporate governance law in the wake of the Enron and WorldCom fiascos. But the legislator points to the potential benefits of passing pro-investor legislation in an election year and denies trying to co-opt the issue from Democrats who have accused Republicans and the Bush administration of being too close to big-money contributors. "Certainly, there is a political element to it; the investor class is quite large and diverse," he says. "I have a long history of trying to protect the growing investor class."
Congress-watchers in the financial services industry are somewhat skeptical about the need for legislation along the lines of what Baker proposes. They believe the Securities and Exchange Commission already has the laws and tools to regulate funds adequately, if given support for tougher enforcement from the White House. "I think there may be some frustration by Mr. Baker that historically the SEC may have moved too slowly," says Geoff Bobroff, a consultant to the money management industry. "When [New York Attorney General Eliot Spitzer] ratcheted up his enforcement action, there's no question that influenced Congress."
Like skeptical legislators, Bobroff adds that some of the steam has been taken out of the legislative push by the stock market's steady rise. "Investor sentiment has improved" with the Dow Jones industrial average's 25 percent jump last year and continued run-up this month, Bobroff says. "There is probably a great deal less angst about `Oh, my 401(k) statement.' "
Unlike some in Congress, Baker publicly professes support for the actions of Spitzer, whose investigation into mutual fund trading abuses led to charges against fund companies and executives, forcing some high-level resignations. But Baker proudly notes that he introduced his bill in June, before Spitzer's findings were announced. "I don't fault [Spitzer] for doing what he has done," he says, "but frankly, the Congress was out in front of him on all counts."
Federal muscle. Even so, Baker remains a firm believer that it is the job of the federal government, and not the states, to regulate the financial markets. After Spitzer settled with Merrill Lynch for $100 million over allegations of conflicts of interest by its analysts, Baker wrote a letter to the nation's other 49 attorneys general asking them not to follow Spitzer's example and threatening them with legislation that would curb their powers. They let Spitzer take the lead.
Baker's bill would bar insiders from short-term trading in shares of their own funds. It would also require that at least two thirds of a mutual fund's board be independent of the money manager who chooses the investments for the funds, a standard that, not surprisingly, has drawn opposition from the fund industry. Baker also would seek restitution from the fund companies, and wants individual investors to "be made whole" by imposing stiff fines and penalties on funds and their managers who run afoul of standard trading practices. And he is pushing for disclosure of mutual fund fees, requiring fund companies to show in their reports to investors how much they are paying in operating fees on a hypothetical $1,000 investment. The fund industry takes the position that funds can continue to be regulated by the SEC and, while publicly supporting fee disclosure, argues that legislation to force this could end up costing investors more.
Though Baker maintains that most of his financial services battles aren't done specifically for the benefit of his district--which has few direct ties to the industry, except for the investments of its residents--he is especially proud, he says, that upon his return home during the December recess, some constituents thanked him. "This is our voting base that loses through these ill-gotten gains," he says. "It's my responsibility--it's all of our responsibilities."
This story appears in the January 19, 2004 print edition of U.S. News & World Report.