"You Cannot Legislate Honesty"

Fund manager Robert Olstein says the SEC regulators have overstepped the mark

Robert Olstein, who runs the $1.9 billion Olstein Financial Alert Fund (OFALX ), calls himself an "anti-Establishment" guy. He's known for poring through financial statements, looking for accounting abuses, and taking management to task. Now, Olstein is turning his sights on mutual-fund regulators, arguing that they've gone too far in their crackdown. Another batch of regulations take effect Oct. 5, a little more than a year after the fund scandals broke. He aired his concerns in an interview with BusinessWeek's Karyn McCormack.

What's your basic beef with the new rules?

The SEC and the critics of the industry, who are trying to stamp out criminality and poor ethics, put in new regulations that are anti-shareholder. For instance, they're asking me to resign as chairman [of my fund company]. Not that the chairman is anything other than a figurehead, but it's sending the wrong message to shareholders. There has been a very profitable relationship between mutual funds and individual shareholders.

How do the new rules affect you and your shareholders?

I spend half my day now dealing with regulatory issues. Also, our costs have gone up over $1 million. The rules are adding insignificant costs to the giant firms, and adding significant costs to the smaller and midsize funds, like mine. These high costs will keep entrepreneurs out of the business.

What's your problem with adding more independent directors?

We have four independent and three affiliated directors. Only independents can serve on the audit committee. Only independent directors can vote on whether to rehire me. So having to add independent directors accomplishes nothing.

The U.S. Chamber of Commerce has said it will sue the SEC over the new independent-director rule.

They should. The SEC overstepped its bounds. I don't think it should be telling people who should be chairman.

Aren't regulators just trying to prevent conflicts of interest?

You cannot legislate honesty and integrity. You punish, disgorge fees, you fine, and the SEC did a good job on that. [New York Attorney General Eliot] Spitzer did a good job on uncovering the issues, but then he went too far. He started telling funds what they should charge. They want us to lower fees, yet they're increasing our costs! Sure, there were some cockroaches in the sink -- you don't blow up the whole building.

So the SEC is going too far?

I'm not for anyone behaving criminally or unethically. But there are 1,000 funds that have returned 10% or more between 1998 and 2003 despite a bear market. Does that sound like an industry that doesn't work? I don't think so.

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