From the April 2010 issue of Investment Advisor • Subscribe!

Aguilar Suggests Ways Forward on Reform

SEC Commissioner says investors' faith must be restored

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Nearly 18 months after the economic crisis erupted, SEC Commissioner Luis Aguilar, in a speech before the 2010 Mutual Funds and Investment Management Conference on March 15, offered some steps to mend investors' sense of betrayal and loss of faith in the financial system.

In the speech in Phoenix, sponsored by the Investment Company Institute and the Federal Bar Association, Aguilar began his comments by revisiting the quote, "Investing is an act of faith," from the landmark 1999 book, Common Sense on Mutual Funds, by John Bogle. Bogle, founder and former CEO of Vanguard, said in December that because of the recent crisis the quote should be revised to say, "the faith of investors has been betrayed." Aguilar said that while the crisis created a clamoring for radical change, any such change should be "oriented toward the needs of investors."

One of the main concerns of those investors, he said, was how a new systemic risk regulator would be deployed. Aguilar said he didn't want the new regulatory body to be too focused on institutions that were "too big to fail" while ignoring "retail investors by thinking of them as 'too small to matter.'"

The question of who defines systemic risk was spelled out in legislation by Senator Christopher Dodd (D-Connecticut) that he released March 15 (see Washington Watch, page 23). Dodd wants the Federal Reserve to play a big role in this area--the legislation would create a new division within the Federal Reserve to protect financial consumers--while Aguilar, who spoke before Dodd unveiled his reform bill, would prefer a "council of regulators." Aguilar believes that dividing up the regulatory power would "ensure a complimentary relationship between the primary regulator and the systemic risk regulator."

Aguilar said that how the risk regulator was implemented could greatly impact the mutual fund industry. If the regulator was too centered on banks, he said, then the regulator "may want money market funds to be regulated as banks, and/or want them to be required to have some sort of insurance to protect shareholder assets."

Another key factor for the mutual fund industry was the vitality of the SEC, Aguilar said. That is why Aguilar wants the SEC to be self-funded. If the SEC has stable financing, he said, it can set multi-year budgets, maintain proper staffing levels, and respond better to market changes. A strong and credible SEC, Aguilar maintained, "has been a critical factor in developing the trust that investors have had in the industry and in the industry's tremendous growth."

Aguilar also emphasized his support of the SEC's Rule 2a-7, which limits the risk money market funds can take, and the Commission's recent strengthening of the safeguards in the rule. Aguilar said, "The new requirements of 2a-7 decrease the likelihood that money market funds will go through a crisis like we experienced in late 2008--and they will serve to better align the funds' ability to maintain a net asset value, typically at $1.00 per share, with the expectation of investors that one dollar in means one dollar out. This may be the most important expectation that investors have when they invest in money market funds. It needs to be protected."

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