SEC Commissioner Luis A. Aguilar delivered a speech discussing the main issues and debates surrounding the mutual fund industry, including the SEC’s authority, equity market structure and cybersecurity threats.
According to Commissioner Aguilar, the SEC historically has taken a “proactive” role in the asset management industry; however, he stated, activities of the Financial Stability Oversight Council (“FSOC”) and its research arm, the Office of Financial Research (“OFR”), have recently undercut the SEC’s authority. Commissioner Aguilar outlined the history of the SEC’s regulation, mentioning recent rulemakings, such as rules to enhance the custody practices of investment advisers and reforms to money market mutual funds, to highlight the SEC’s expertise overseeing the mutual fund industry. Additionally, Commissioner Aguilar criticized the FSOC and OFR research of mutual funds, citing the inadequacies of the OFR’s September 2013 study of the asset management industry. According to Commissioner Aguilar, the SEC “does not have input or influence into what FSOC or OFR says or does.” He noted that a mechanism should be developed by which the entire SEC, not just the Chair or staff, could “provide meaningful input and coordinate with the leadership of FSOC and OFR.”
Commissioner Aguilar also discussed the mutual funds and equity market structure, mentioning the debate surrounding the “maker-taker” pricing model. Commissioner Aguilar explained the pros and cons of the model, stating that the SEC needs to consider seriously whether the current equity market structure is working for all investors. He mentioned that one recent recommendation from a commenter would be to create a pilot program in which maker-taker rebates were temporarily prohibited for certain securities in order to allow the SEC and others to study the effects of the maker-taker model on order routing practices, transparency and other metrics.
Additionally, Commissioner Aguilar discussed increasing concerns regarding cyber-threats, stating that “mutual funds and their advisers are not immune to the ever-present threat of cyber-attacks.” He stated that he expects SEC examiners to review whether asset managers have policies and procedures in place to prevent and detect cyber-attacks, and whether asset managers are properly safeguarding their systems against security threats.
Lofchie Comment: Criticism of the FSOC by the SEC is now bipartisan, since Democratic Commissioner Aguilar joined with Republican Commissioners Gallagher and Piwowar in saying bad things (not just having bad thoughts) about the FSOC. Commissioner Gallagher previously had made a very significant structural criticism of the FSOC, noting that it effectively transformed various agencies that represent both Democrats and Republicans into single-party agencies, since only the majority party is represented on FSOC. Commissioner Aguilar’s criticism is, in some ways, even sharper, since he cannot be accused of making a partisan attack, and since his remarks refer to the actual competency of the FSOC.
In the same vein, we have several times commented that Form PF, which is intended to gather information with regard to private funds and is reported to be largely the creation of the FSOC, is a mess, raising key questions as to financial leverage which is so badly drafted that the information must be useless, notwithstanding the fact that great amounts of money have been spent providing it. In short, there is a serious question as to whether FSOC’s mandate is too broad, and its structure, too eccentric, for it to be competent at any specific task.