SEC headquarters in Washington. (Photo: National Law Journal)

Chief among new SEC Chairman Jay Clayton’s priorities should be proposing a “harmonized best interest standard” for broker-dealers and bringing mutual fund disclosure into the 21st Century by allowing ETFs, funds and variable insurance products to deliver prospectuses online, Paul Schott Stevens, president and CEO of the Investment Company Institute, said Friday.

Speaking at the ICI Annual Meeting in Washington, Stevens said that ICI is “deeply disappointed” that the Labor Department’s fiduciary rule was only delayed by 60 days — with a compliance date of June 9 — “because the rule is already causing great harm.”

Stevens said ICI has heard from its members that “hundreds of thousands of small retirement accounts have been ‘orphaned’ just since the Department” announced the rule’s 60-day compliance extension.

“Faced with the sizable if uncertain legal and regulatory risks of assuming DOL fiduciary status vis-à-vis these fund shareholders, brokers are simply resigning from small accounts en masse,” he said. “All this carnage is unnecessary, because, in the end, we believe the rule must be rescinded or significantly revised.”

The SEC should propose a harmonized best interest standard for broker-dealers “that would enhance, rather than replace, existing suitability obligations,” he argued.

If the SEC fails to “take the lead” on such a rule, then “Congress should stand ready,” Stevens said.

Electronic Delivery for Prospectuses

Stevens also noted that in “nearly every other corner of our economy and financial system, consumers readily receive and seek out information online. Yet fund investors are burdened with an antiquated system of paper-based delivery for voluminous shareholder reports and other documents.”

Investors must “affirmatively opt” for electronic delivery, he said, and noted ICI estimates that say “a move to full electronic access could save close to $4 billion over the next 10 years — savings for funds and their shareholders, not for fund sponsors.”

While the agency came close to improving online delivery in the waning days of 2016, Stevens continued, he urged the new Commission to adopt a “three-stage process” for bringing fund disclosure into the 21st century.

Stevens proposed that the SEC adopt a rule allowing mutual funds, ETFs and closed-end funds to meet their delivery obligations by posting required disclosure documents online and providing investors the opportunity to opt for paper.

At the same time, he said, the SEC “should permit variable insurance products to develop and use summary prospectuses, delivered online.”

Longer term, he said, the SEC should “review the content of fund shareholder reports to make them more useful to investors.”

New Rule on Funds’ Use of Derivatives

Stevens also called on the SEC to issue a new proposed rule to modernize “decades’ worth of guidance on funds’ use of derivatives.”

While ICI supports the current rule plan in part: “that funds should establish formal derivative risk management programs, and we support appropriately tailored asset segregation requirements,” Stevens said, “but other portions of the proposed rule would sharply — and excessively — restrict funds’ use of derivatives.”

Proposed portfolio limits, for example, “could stop funds from using instruments that reduce risk and improve liquidity — even for plain-vanilla bond funds. Hampering funds or driving them to deregister will cost investors more — or deprive them of core strategies,” he argued.

Therefore, a new one should be issued “that combines formal risk management programs with an appropriate asset segregation regime. Such a rule will encourage funds to invest in the derivatives market confidently and responsibly — to the ultimate benefit of their investors.”

— Check out New Share Classes in a DOL Fiduciary World on ThinkAdvisor.