The New Year had barely begun, but the Securities and Exchange Commission was already bombarding investment advisors and mutual funds with a bunch of proposed regulations. And don’t expect the commission to let up anytime soon.
“The SEC is meeting every two weeks and coming out with major rules,” says David Tittsworth, executive director of the Investment Counsel Association of America (ICAA) in Washington, D.C. Some of the proposed rules, specifically those requiring advisors to have written compliance programs and to appoint a chief compliance officer (CCO), as well as the rule that requires advisors to have personal trading codes of ethics, “will affect all investment advisors, not just mutual fund managers,” he says.
The SEC has expressed interest in having the fund’s chief compliance officer and the advisor CCO be the same person, says Caroline Schaefer, an ICAA attorney. ICAA is now drafting a comment letter to send to the SEC that focuses “on the inconsistencies between the fund CCO being an advisor employee, while at the same time the fund board has control over a termination,” Schaefer says.
Michael Tannenbaum, co-founder and partner of Tannenbaum, Halpern, Syracuse & Hirschtritt LLP in New York, who leads the firm’s financial services, hedge funds, and capital markets practice group, says the SEC’s compliance rule is unnecessary because “legitimate” investment managers and advisors already abide by compliance rules. They’re just not written down. “Writing [rules] down costs money,” Tannenbaum says. “Any time you add infrastructure, either the investing public is going to pay for it, or it’s going to end up being another bar to entry into the business for young [hedge fund and investment] managers.”
Tannenbaum believes the SEC is pushing advisors to adopt a compliance program and to appoint a compliance officer because if it decides to make all hedge fund managers register with the SEC, it won’t have an adequate staff to audit them. The compliance programs are “akin to an internal audit program to take the place of the outside audits,” Tannenbaum says, “and that will make some of the SEC audits easier.”
Advisors must adopt a compliance program by October 5. But as Tannenbaum notes in his firm’s “Bullet Point” newsletter to clients, the SEC has yet “to release any staff guidance as to how to conduct an internal review of an investment advisor’s compliance program.” He continues: “Not knowing what areas to review may render the annual review obligation a counterproductive exercise, especially if investment advisers are reviewing areas that the SEC does not consider to be critical.”
Because the compliance date isn’t until October 5, and annual reviews won’t start until 2005, Tannenbaum suggests that investment advisors ask the SEC for guidance on what areas to consider when conducting an annual review–guidance perhaps similar to the self-audit guide that the National Futures Association provides to its members.
Mutual Fund Rules
At its meeting last month, the SEC proposed rules designed to protect mutual fund investors. The first rule would require that 75% of a mutual fund’s board of directors be independent and that the chairman also be independent.
But Geoff Bobroff, an independent mutual fund consultant in Rhode Island, questions whether such a new structure offers much change. “So much of what the board does, as a general rule, is so regulatory-based, that I don’t think giving the board control of the agenda really gives a lot of change to the metrics that the board goes through,” Bobroff says. “The question becomes: Does it change the process? I think we’ll have to wait and see.”
The SEC also proposed increasing the amount of disclosure on mutual fund trade confirmations. The third proposed rule would require advisors to adopt a code of ethics that addresses such issues as personal trading by employees who have access to nonpublic information.
And the hits to the mutual fund industry just keep on coming. On February 11, the SEC plans to consider: a final rule to require funds to disclose semiannually the dollar amount of fees and expenses that shareholders pay; proposed amendments to rule 12(b)-1 that would prohibit funds from using brokerage commissions to pay broker/dealers for selling fund shares; and a proposal to include disclosures in fund annual reports to shareholders about the reasons supporting their directors’ decision to approve the fund’s investment advisory contract.
On February 25, the SEC plans to consider a proposal that would require mutual funds to impose a mandatory redemption fee on market timers, and any pertinent recommendations from the NASD’s Omnibus Account Task Force. And in early March, the commission will consider proposals that would improve disclosure to fund shareholders about their portfolio manager’s relationship with the fund.