Meet Bob Pozen, the cleanup man of mutual funds

It belongs to Robert Pozen, a veteran fund executive, lawyer, teacher, regulator and writer who was hired last month as non-executive chairman of MFS Investment Management.

What's a non-executive chairman? In this case, it's an outsider with enough stature and force of personality to clean up after a $351 million mess at a big-name money management firm.

That is the amount MFS, which started the first U.S. mutual fund 80 years ago and now manages about $140 billion, agreed to pay to settle regulators' allegations of allowing improper trading.

"MFS, I believe, is fundamentally a very sound and ethical company," Pozen, 57, said in an interview in his Boston office overlooking the Charles River. "They made a mistake, and they paid a very big price. We have to reaffirm the tradition of integrity."

Barely more than a month after Pozen's hiring, MFS announced a series of policy changes that include a ban on the use of brokerage commissions to pay for investment research or to reward brokers for selling shares of MFS funds.

These are long-standing industry practices whose merits are much debated as potential areas for reform. For Pozen, MFS' seize-the-initiative move means putting some of his own political capital at risk. "You bet I am," he said.

Pozen has plenty of that capital to draw upon.

He earned acclaim as a disciplinarian and problem-solver in the 1990s while in charge of the sprawling group of money managers at industry giant Fidelity Investments.

He retired from Fidelity in 2001 after 14 years there.

Since then, he has taught business and law at Harvard, where he continues as a visiting professor, and served on a presidential panel charged with recommending how to revamp the Social Security system. In 2002, he was named chief of commerce and labor for the state of Massachusetts.

When the scandals broke, "I wasn't surprised that hedge funds were involved in these sorts of deals," he said. "It's been my position for a long time that hedge funds are under-regulated, especially in comparison with mutual funds.

"I was surprised at the number of mutual fund complexes that were involved and the depth of some of the issues. I ran a pretty clean shop at Fidelity, as we've seen." Fidelity has remained untainted in the scandal.

As the author of a 589-page textbook, "The Mutual Fund Business," which is now in its second edition, Pozen was a natural person to ask: How did the funds, so proud of their self-proclaimed "tradition of integrity," get into this mess?

"It's an effect of the 1990s' bubble bursting," he said. "The industry used to be dominated by free-standing companies run by investment people. Then you had a huge acquisition boom in 1999 and 2000, led by banks and insurance companies from Europe and then the U.S., in many cases paying very high premiums.

"You had a very different composition of the industry," he said. "It became a fee-income ancillary business, often run by marketing people. That changed the culture a lot."

One focus of some fund reformers has been driving fund fees down. So, I asked Pozen, when all is said and done, will fund fees in general be lower?

"I would guess they'll probably stay about the same," he said. "There are increased competitive pressures. But with the regulatory changes, you're building in a much bigger core cost requirement. New compliance, more frequent reports -- each one of these costs money."

While fund assets have continued to grow strongly despite the scandals, Pozen says fund companies must adjust to slower growth than in the 1990s.

"There is a flight to cleanliness, to perceived cleanliness," he said. "It's even more important now to have integrity and trust. The growth rate of the industry in the 1990s, when assets went from $1 trillion to $7 trillion, was unsustainable.

"The industry has to learn to live with a lower growth rate, but it's still a very good growth rate," Pozen said. "We can live pretty well at 15 percent growth rather than 50 percent a year."

Chet Currier covers the mutual fund markets for Bloomberg News. He can be reached at 212-318-2605.

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