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SEC Wants to ‘Keep Alive’ the ’40 Acts Through New Regs; Bogle Talks ETFs

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Future regulatory measures that will “keep alive” the promise of the Investment Company Act and the Investment Advisers Act include third-party exams for advisors, a uniform fiduciary rulemaking, transition planning rules for advisors as well as annual stress testing for large investment advisors and funds, Securities and Exchange Commission Chairwoman Mary Jo White said Tuesday.

Speaking at the SEC’s event to celebrate the 75th anniversaries of the Investment Adviser and Investment Company Acts at SEC headquarters in Washington, White said that the aforementioned upcoming rules are part of the agency’s “ambitious agenda” to address evolving risks for funds and advisors. White also noted the recently proposed rule to enhance data reporting by investment companies and advisors, as well as the rule proposed on Sept. 22 to require open-end funds to enhance their liquidity risk management. 

“As we speak,” White said, staffers are also developing recommendations she hopes to advance for the Commission’s consideration by the end of this year related to the use of “derivatives by funds, including measures to appropriately limit the leverage these instruments may create, as well as enhancing risk management programs for such activities.”

While asset management pioneers as well as former SEC chairmen concurred at the event that the Acts have stood the test of time — with the Investment Company Act helping to spur growth in the $90 trillion fund industry — they nonetheless noted ongoing challenges the agency faces in crafting regulations, namely for exchanged-traded funds.

Vanguard founder John Bogle as well as James Riepe, retired vice chairman of Baltimore-based T. Rowe Price, where he is now a senior advisor, differed on their views as to whether ETFs are actually mutual funds.

While the principles of the ‘40 Act “have been remarkably stable and accurate,” Riepe said, “I think the products and services have become so complex it has become more and more difficult to interpret the Act into regulation.”

A “very good” example of this, he said, is in ETF regulation. ETFs “don’t belong under mutual funds,” he said. “I think we’re trying to force a square peg into a round hole by trying to force ETFs into ‘40 Act regulation.”

Bogle countered, “ETFs are funds — they are structurally the same but you can trade them all day long. Why would anyone want to trade the S&P 500 all day long?”

Said Bogle: “There are some ETFs that fit easily into the mutual fund definition.”

That being said, “We have to think about a new way of regulation; we need it badly — you get regulation only when you deserve it; that’s where we are today.” Former SEC Chairman David Ruder (who served from 1987 to 1989) noted that ETF trading today is performed mostly by institutional investors, not retail ones. “I don’t think the average investor is buying and selling ETFs,” he said. The Commission “needs to be sensitive that this [ETF space] is an institutional market” and needs to be regulated as such.

Don Philips, Morningstar’s managing director of research, noted the large number of “startups” in the ETF space, adding that as it stands now, the “worst problems have been in the fixed-income arena,” with “huge liquidity issues going on in the fixed-income area [along with] miscommunication of risk.” This is the area, he said, “where investors are most vulnerable.”

Former SEC Chairman Richard Breeden, who served from 1989 to 1993, said that his “biggest concern is the pace of technology and whether the Commission can keep up” with it. He warned that the two Acts “won’t work [if the SEC] squashes innovation and competition — that’s what made these Acts successful.”

T. Rowe Price’s Riepe noted two areas where mutual funds have continued to act in a fiduciary capacity: closing funds to new investors and adoption of the short prospectus. “Large amounts of assets make it more difficult to manage [a fund] in an effective way,” he said. “A lot of organizations have closed funds because they believe it will reduce their ability to manage them effectively for shareholders — that is very much a fiduciary act, thinking of investors first.”

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