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Any SRO For Mutual Funds Must Protect Competition, Says ACLI

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Any SRO For Mutual Funds Must Protect Competition, Says ACLI



Any proposal to establish a self-regulatory organization for mutual funds should contain protections against anti-competitive behavior by the SRO, says the American Council of Life Insurers.

The issue involves the possibility that the Securities and Exchange Commission will consider establishing an SRO for mutual funds.

A recent article in the Wall Street Journal suggested it, but there is no direct, formal statement from the SEC.

The only SEC comment is contained in its Daily News Digest of Jan. 28, where it says that during the Commissions Feb. 4 meeting, it “will consider a recommendation to seek comment on other ways to involve the private sector in fostering compliance by investment companies and investment advisors with the federal securities laws.”

Carl Wilkerson, chief counsel for securities with the Washington-based ACLI, says the experience with the National Association of Securities Dealers, which operates as an SRO for broker/dealers, shows that it is heavily skewed toward full service broker/dealers to the detriment of limited service broker/dealers affiliated with insurance companies.

If there is an SRO proposal for mutual funds, Wilkerson says, ACLI will be monitoring it closely to assure it has strong protections against anti-competitive conduct.

Chris Wloszczyna, a representative with the Investment Company Institute, Washington, says the issue of establishing an SRO for mutual funds comes up from time to time.

In each case, he says, the conclusion has been that direct regulation by the SEC is preferable.

Wilkerson says the issue is allocation of resources within the SEC; namely, whether the SEC should directly oversee mutual funds and investment advisors or externalize oversight to an SRO.

But he notes that SRO oversight wont happen for free. While under the current system of direct SEC oversight there are no direct costs, he says, a new SRO system might charge membership fees, as does the NASD.

Wloszczyna says ICI has always supported a strong system of regulation to protect the interests of mutual fund shareholders and supports adequate funding for the SEC to carry out its responsibilities.

The mutual fund industry has been scandal-free for more than 60 years, Wloszczyna says, but ICI will carefully consider any proposals.

On the issue of conflict of interest, Wilkerson says that when NASD first became the SRO for broker/dealers, there was an inherent conflict of interest relating to its proprietary NASDAQ operation.

Eventually, Wilkerson says, Congress and the SEC required NASD to bifurcate, thus separating the SRO from NASDAQ.

If there is to be a proposal to create a mutual fund SRO, Wilkerson says, it should simply be an SRO and there should be no proprietary business franchise affiliated with it.

Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.