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Regulation and Compliance > Federal Regulation > SEC

A Long, Hot Regulatory Summer

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Get ready for a number of regulatory changes to hit home this summer. The SEC is set to release proposed rules soon regarding credit ratings agencies, rule 12b-1, as well as interpretive guidance on the use of soft dollars. The SEC is also busy developing a framework for mutual recognition–which would allow foreign broker/dealers to do business in the U.S. without registering with regulators. Meanwhile, FINRA is working feverishly on rules regarding variable products and how they can, and should, be marketed and sold.

Eric Sirri, director of the SEC’s Division of Trading and Markets, told attendees at the Securities Industry and Financial Markets Association’s (SIFMA) legislative and regulatory conference in Washington May 1 that the new proposal regarding credit ratings agencies will focus on increasing transparency. He said that structured finance products will be addressed in the proposed rule, keying on “the nature of the assets in the pooled vehicles,” as well as refining and “raising the bar” on conflicts of interest.

Also, he said, the SEC will debate whether it’s appropriate to have different ratings symbols for different products.

As for mutual recognition of foreign broker/dealers, Sirri explained in a speech April 30 in New York that a mutual recognition framework “has not been settled.” One possibility, if adopted by the Commission, “could provide foreign exchanges and foreign broker/dealers an exemption from certain U.S. registration and regulatory requirements,” he said, but only if those exchanges and B/Ds were “regulated in a foreign jurisdiction with a comparable securities regulatory regime that achieves similar results in addressing certain core principles that we view as integral to our own system of regulation.” In other words, Sirri said, the foreign regulators would have to provide investors with a “high level of protection similar to that provided under U.S. law.”

Sirri said at the SIFMA event that the SEC is also considering reforms to Securities Exchange Act Rule 15a-6, which exempts foreign B/Ds from standard registration requirements. Since being adopted in 1989, he said in his April 30 speech, Rule 15a-6 has raised areas where it “may impose unnecessary impediments to U.S. investor access to foreign broker/dealers.” Possible revisions to Rule 15a-6, he said, “would likely focus on streamlining the rule’s intermediation requirements.” Sirri added that the advantage of pursuing both measures–mutual recognition and reforming Rule 15a-6–”is that foreign broker/dealers that would not meet the conditions for relief under the mutual recognition framework, or that operate in a jurisdiction that was not a party to mutual recognition, would be able to conduct transactions under a revised Rule 15a-6.”

Sirri noted at the SIFMA event that the SEC has already begun formal discussions with the Australian Securities and Investment Commission and the Australian Treasury Department “to explore the development of a mutual recognition arrangement for the two nations’ securities markets.” The SEC is looking at Australia as a pilot, he said.

About Rule 12b-1 . . .

Andrew “Buddy” Donohue, director of the SEC’s Office of Investment Management, gave an update May 1 on the issues SEC staff is reviewing as it crafts its 12b-1 overhaul rule. The SEC is now mulling the role of fund directors, what the 12b-1 fees are actually used for, and disclosure issues concerning how investors are informed about 12b-1 fees. The SEC is taking an investor-friendly approach regarding 12b-1 reform, he said. Donohue said the SEC is “cognizant of the tax consequences” of potential changes to 12b-1 and is talking with large mutual fund companies about the potential effects of specific changes.

Donohue also said his division is close to delivering proposed interpretive guidance that addresses the role of investment companies’ directors in overseeing soft dollars.

And Variable Products . . .

Meanwhile, Thomas Selman, executive VP for Investment Companies/Corporate Financing Regulation at FINRA, said at the SIFMA event May 1 that FINRA is now working on three areas concerning variable products. First, FINRA is working to codify best practices firms have adopted as they relate to Rule 2821 regarding transactions in deferred variable annuities, which became effective May 5. Rule 2821 includes recommendation requirements (including a suitability obligation), principal review and approval requirements, and supervisory and training requirements tailored specifically to transactions in deferred variable annuities. FINRA has delayed implementing the principal review portion of the rule, because “we will be submitting some changes to that particular part of the rule to the SEC in the very near future,” says Herb Perone, a FINRA spokesman.

FINRA is also reaching out to state insurance commissioners, Selman said, to educate them about FINRA’s role in regulating broker/dealers’ sales of variable products. Plus, he said, FINRA is unifying the rules as they apply to marketing and advertising of variable products.

And Finally, let’s not forget Hedge Funds

Hedge funds, too, are also on the regulatory hot seat now. Anthony Ryan, assistant secretary of the Treasury for financial markets, was also on hand at the SIFMA event, and noted that the President’s Working Group on Capital Markets recently released “Best Practices for Asset Managers,” which requires hedge funds to adopt comprehensive best practices in areas of disclosure, valuation of assets, risk management, business operations, compliance, and conflicts of interest.

A “Best Practices for Investors” standard was also released and includes The Fiduciary’s Guide and The Investor’s Guide. The Fiduciary Guide, Ryan explained, gives recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor’s Guide, he said, provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to an investment portfolio. “In the months ahead,” Ryan said, “we believe that it is critical to see these implemented.”

Washington Bureau Chief Melanie Waddell covers government and regulatory issues in this column monthly. She can be reached at [email protected].


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