SEC Director of the Division of Investment Management (the “Division”) Norm Champ delivered a speech, at the 2014 Mutual Funds and Investment Management Conference, about recent developments and rulemaking initiatives within the investment management industry.
According to Mr. Champ, it is important for the Division to innovate in order to keep up with the market, and such innovation begins with the internal organization of the Division. Mr. Champ stated that the Division was recently restructured into four groups to reflect its key functions: (i) disclosure, (ii) guidance by the Chief Counsel’s office, (iii) rulemaking and (iv) business operations, including risk monitoring and analysis. Mr. Champ noted that this reorganization will ensure the continued cooperation between outside stakeholders and the Division. In this regard, he described the exemptive application process as “the laboratory where we examine and consider new ideas from market participants.” Mr. Champ also mentioned the newly created Risk and Examinations Office (“REO”), which maintains an industry-monitoring program to provide ongoing financial analysis of the investment management industry, with a particular focus on strategically important investment advisers and funds.
Director Champ also discussed rulemaking initiatives, explaining that the Division uses a four-factor approach to analyzing policy initiatives: (i) a thorough review of the risk or risks to be mitigated by the proposed rulemaking, (ii) a consideration of the urgency associated with a particular initiative, (iii) an analysis of the potential impact of an initiative on investors, registrants, capital formation, markets and the SEC’s operational efficiency, and (iv) a review of the applicable resources associated with a policy initiative. Mr. Champ went on to describe rulemaking achieved in the last year, including a new rule to implement the JOBS Act requirement to lift the ban on general solicitation and general advertising for certain offerings, an area where, he indicated, more rulemaking was in progress. He also stated that the staff was studying potential money-market mutual fund reforms, as well as other reforms related to disclosure by investment companies.
As to other product areas in which the staff was considering rulemaking initiatives, Director Champ mentioned variable annuities and retirement funds.
Furthermore, Mr. Champ said, in addition to increasing the amount of staff Guidance Updates issued to better inform the public, the Division is also seeking ways to inform its own staff about industry developments and has met with senior management at funds, advisory firms and fund boards to discuss trends and issues in the industry. Regarding these issues, Mr. Champ noted that the Division will monitor the migration of individual investors from brokerage accounts to advisory accounts, as well as the challenges that funds and investment advisers face concerning cyber security risks. As to cyber risks, he said that advisers should have procedures both to protect fund information and to mitigate the impact of any cyber-attack (a “rapid response capability”).
Lofchie Comment: Two points stood out in SEC Director Champ’s remarks: (i) cyber security and (ii) the movement of accounts from brokerage accounts to advisory accounts. As to the latter, it is predictable that regulatory pressure to impose “fiduciary” obligations on brokers who give any investment advice would result in their transferring full-service customers (that is, customers who receive advice as an incident to securities brokerage) into advisory accounts.
It seems both unprofitable and imprudent for brokers to give advice to retail customers on a transaction-fee basis if the brokers may then be held liable for failure to consider their clients’ overall financial situation. The imposition of a fiduciary obligation on brokers cannot be compensated for on the basis of transaction fees. These obligations could have a negative effect on smaller clients if the obligations resulted in broker-dealers discontinuing the offer of full service to smaller retail clients.
See: Director Champ’s Remarks.