More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
With the comment period on the Securities and Exchange Commission's (SEC) proposed rules regarding target date funds having officially closed Monday, August 23, it won't take the securities regulator long to sift through the paltry 44 recommendations it received from industry officials and lawmakers.
The low number of responses is interesting given the fact that target date funds' prominence in retirement portfolios continues to grow. Today, according to the SEC, assets of target date funds registered with the SEC total approximately $270 billion.
The SEC proposed its rules, which seek to provide investors with enhanced information about target date funds, on June 16. When the rules were proposed, SEC Chairman Mary Schapiro said that they "would help to clarify the meaning of the date in a target-date fund and improve the information provided when these funds are advertised and marketed." Schapiro also said that the proposed rules "would enable investors to better assess the anticipated investment glide path and risk profile of a target-date fund by, for example, requiring graphic depictions of asset allocations in fund advertisements." The rules also "would require an asset allocation 'tag line' adjacent to a target-date fund's name in an advertisement," she said.
Kevin Keller, CEO of the CFP Board of Standards, told the Commission in his comment letter that while the CFP Board "generally supports" the adoption of the SEC's target date fund proposals, the SEC needs to "require certain additional disclosures in order to increase investors' understanding of their portfolio composition and associated risks." The SEC, Keller wrote, should require "disclosures aimed at enhanced understanding of a target date fund's glide path and asset allocation at the target date and landing point. Further, the SEC should require additional information about specific asset sub-classes in which a target date fund invests."
Finally, he said, "the SEC should require clear and prominent disclosures that will alert investors when a target date fund's equity allocation differs materially at the target date, landing point, and during the five-year periods immediately preceding those dates, from the average allocations of peer funds with the same target date."
Members of the Senate's Committee on Help, Education, Labor and Pensions (HELP), Senators Michael Enzi (D-Wyoming) and Tom Harkin (D-Iowa), along with Senator Herb Kohl (D-Wisconsin), chairman of the Senate Special Committee on Aging, sent a joint letter to the SEC.
The Senators expressed their "deep" concern about the "limited scope" of the proposed rule in that the disclosures required would only affect mutual funds. "Not all target date
funds are mutual funds," the Senators told the SEC. "A growing number of defined contribution plan fiduciaries are electing to use 'custom' target date funds (i.e., target date funds constructed from investments otherwise available through the plan) or funds that may be exempt from the Investment Company Act of 1940, such as bank maintained collective investment trusts or insurance company separate accounts," the Senators wrote in their comment letter.
Therefore, they continued, "We encourage the SEC to find ways to expand the application of the proposed disclosure requirements, within its authority, to all target date funds being offered to defined contribution plans." To the extent the SEC lacks jurisdiction, they said, the SEC should work closely with the Department of Labor (DOL), "which has broad authority to regulate the use of pension plan assets and the services provided to plans, and other appropriate regulators."
The DOL issued in May guidance for participants to use when selecting a target date fund. Next up on DOL's agenda, says a DOL spokesperson, is the release, likely in September, of informal guidance for plan fiduciaries on areas to consider when thinking about adding a target date fund to their line-up of investment options, or when considering using a target date fund as a qualified default investment alternative (QDIA).
The Senators also say that while they support the SEC's proposal to require that a target date fund's name be accompanied by additional information about the fund's asset allocation and the requirement that marketing materials contain a depiction of the fund's glide path and other disclosures, they remain concerned that, "on its own, the depiction of a fund's glide path fails to provide any real context or explanation that would actually help the average investor determine if the investment is appropriate for them." The SEC, therefore, should broaden the scope of the disclosures required in marketing materials to explain the following:
o the age group for whom the fund is designed;
o the relevance of the date used in the fund's name;
o the fund's assumptions about the investor's withdrawal intentions after reaching the target date;
o the rationale behind the glide path used in the target date fund; and
o whether the target date fund is intended to be a fund of funds and, if so, whether any of the underlying funds are affiliated with the target date fund's manager.