While the “legal framework” of the nearly 75-year-old Investment Company Act of 1940 has enabled strong growth in mutual funds and ETFs, SEC Commissioner Kara Stein voiced her concern Wednesday that “some cracks” are starting to appear in the framework’s foundation, particularly regarding bank loans, ETFs and alternative mutual funds.
Noting the agency’s continued work on rule proposals to enhance data reporting for registered investment companies, which include mutual funds and ETFs, Stein said Wednesday, during a speech at the Brookings Institution in Washington on mutual funds over the next 75 years, that it’s important to assess how the Investment Company Act is working — or not.
Stein also said that she expects the Securities and Exchange Commission to be presented with a uniform fiduciary rulemaking by Chairwoman Mary Jo White. “The devil will be in the details on what that proposal will look like,” Stein said. “If it were simple,” Congress would have told the SEC how to implement such a standard in the Dodd-Frank Act statute.
The agency, Stein continued, has to “think about the intended and unintended consequences” of a fiduciary rulemaking. She noted the Department of Labor’s fiduciary reproposal is looking at who’s a fiduciary under the Employee Retirement Income Security Act, “which is different” than securities laws under the SEC’s purview.
“We need to have these robust policy debates” around the fiduciary issue, Stein said. “This [fiduciary rulemaking issue] is not easy, and there is no one silver bullet solution.”
As to registered funds, Stein said that “it appears registered funds have slowly drifted toward a more flexible and permissive disclosure regime,” which “increasingly places the onus on the retail investor to figure out whether a fund is right for him or her.” But retail investors, “who generally tend to be less sophisticated in financial matters, might not even understand what he or she needs to know to make that decision.”
For example, she continued, “the liquidity of registered funds is one area where it seems that regulation has drifted into ‘buyer beware.’”
The importance of registered funds going forward, she said, can’t be understated.
Over the next 35 years, she said, the senior population in the U.S. is expected to “swell.” Figures estimate that roughly 15% of the total population now is 65 or older, or approximately 46 million Americans. By the year 2050, there are projected to be nearly 88 million Americans age 65 and older, which is roughly 22% of the total projected population, she said.
Since the Investment Company Act was set up, the American mutual fund and ETF market has become the largest in the world, with nearly $18 trillion in assets under management at the end of 2014 — which is more than 50% of the worldwide market. “If you have a 401(k) plan for your retirement savings or a 529 plan for a child’s college education, you likely are an investor in a registered fund,” she said.
Stein noted the proposed new rules the agency is working on to improve the data that registered funds report to the Commission and to the public, as well as SEC staff examining potential changes to liquidity management rules and derivative rules for registered funds. “All of this comes,” she said, “against the backdrop of the Financial Stability Oversight Council and others taking a closer look at the potential systemic risks posed by asset managers and registered funds.”