From the June 2011 issue of Investment Advisor • Subscribe!

June 1, 2011

Schapiro Says SEC to Focus in July on Fiduciary, 12b-1

Commission will look at fund regulation “in tandem” with RIA/BD reform

Mary Schapiro, chairman of the Securities and Exchange Commission (SEC), said in early May that the agency will turn its attention to addressing a fiduciary duty rule for brokers, and harmonization of advisor and broker rules, as well as revisions to mutual fund distribution fees under Rule 12b-1 after July 21, the one-year anniversary of the Dodd-Frank Act.

Schapiro, speaking at the Investment Company Institute’s (ICI) annual conference in Washington, said that the SEC will focus on regulatory changes concerning mutual funds, particularly 12b-1 fee reform, “in tandem” with the investment advisor/broker-dealer reform issues.

The SEC received more than 2,400 comments on its proposed revisions to Rule 12b-1, which Schapiro said raised “some important issues regarding 401(k) plans, disclosure issues, and creating competitive pricing that benefits investors.”

After July 21, Schapiro said, the agency will “put together a rulemaking team” to craft a rule for putting brokers under the same fiduciary standard as advisors. “We continue to seek comment” on both a fiduciary duty rule for brokers as well as harmonization, Schapiro said, adding that she has also asked SEC economists to analyze available economic data regarding fiduciary duty to help inform the rulemaking. Some lawmakers have called for a cost-benefit analysis before any fiduciary rule is promulgated. While the SEC, she said, is focused on putting “in place a fiduciary duty [for brokers] that is no less stringent” than the duty under the Investment Adviser Act, she stressed that any rule must “not limit investor choice.”

As for a self-regulatory organization (SRO) for advisors, which the SEC was required to study under Section 914 of Dodd-Frank, Schapiro said that while the Commission continues to explore the SRO issue, all three options put forth in the SEC’s study to Congress—one or more SROs, extension of FINRA oversight over advisors, or imposing user fees to fund advisor exams—would require legislation to “move forward.”

Schapiro told a Senate Appropriations Subcommittee in late April that the agency would use the recent $74 million funding boost that it received under the FY 2011 continuing resolution to fill vacancies to meet “key strategic needs, perform tasks required by the Dodd-Frank Act, and continue to improve agency operations.”

The funding boost, Schapiro told the Subcommittee on Financial Services and General Government, which is chaired by Sen. Dick Durbin, D-Ill., will allow the SEC to address staffing needs, particularly within the Division of Trading and Markets, Division of Enforcement, and Office of Compliance Inspections and Examinations (OCIE). Schapiro said the agency will use the funds to revitalize core programs like enforcement and inspections activities, as well as addressing new responsibilities such as enhancing oversight of credit rating agencies and adding staff that has expertise in “critical areas,” such as derivatives.

In the last five months of FY 2011, Schapiro said that the SEC will also use some of the additional funds to modernize and enhance the agency’s outdated technology. “We will be making key investments in general IT infrastructure modernization, including refreshing old technology and system hardware and software,” Schapiro said.

Eileen Rominger, the new director of the SEC’s Division of Investment Management, said in late

 

April that the securities regulator’s heavy workload under Dodd-Frank has not deterred the agency from moving forward on “extremely important” issues like 12b-1 reform and oversight of exchange-traded funds (ETFs).

Rominger, the former global chief investment officer at Goldman Sachs, who’s been in her new role at the SEC for two months, said during a speech to mutual fund directors that “prolific” product innovation over the past few years among both mutual funds and ETFs has led to “complexity.” While the “extensive array” of ETFs that have been created are both “straightforward and complex,” she continued, some of the more complex ETFs make extensive use of derivatives, which raises concerns from an investor protection standpoint.

The SEC is also moving forward with the second phase of money market fund reform, Rominger said. The agency is “really pleased with what we are seeing and hearing in response to our first round of money market fund reform put in place last year,” she said, and because of those reforms, “we are in a very different place today in terms of stability and liquidity of money market funds.” The SEC planned to hold a money market fund roundtable at its headquarters on May 10 to get “substantive” feedback regarding further reforms, Rominger said.

Since moving from Wall Street to her current role at the SEC, Rominger said the securities regulator has exceeded her expectations, singling out how impressed she’s been with SEC staff. However, Rominger said the division she heads, along with the entire agency, is still challenged by deficiencies in technology, and noted that her division has fewer staff members than it did five years ago.

Rominger reported that her division, along with others at the SEC, is communicating closely with other parts of the government, such as the Commodities Futures Trading Commission (CFTC) and the Department of Labor (DOL). There’s been “tremendous receptivity to working together,” she said, noting in particular her meetings with the DOL regarding target-date funds and the definition of fiduciary.

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