What’s Next From the Division of Investment Management?
At last week’s IA Week conference, director Andrew Donohue listed a number of investment adviser-related priorities for the Division of Investment Management: The IA/BD study (see related story, this issue). The study, said Donohue, is "one of the largest and potentially most consequential initiatives" being undertaken by the SEC.
Books and records modernization. Might it actually happen under Donohue’s tenure? "From my perspective, and that of many of my colleagues at the SEC and my former colleagues in the industry, the rule has not kept up with changes in the industry and thus is in great need of reform to make its requirements meaningful in the 21st century," he said. "What I envision for this project is a comprehensive review of our books and records requirements, including consideration of the purpose behind each requirement and whether we can obtain the same information in a more meaningful manner."
Form ADV Part 2. Donohue confirmed that the Division staff is working on a re-proposal of Part 2. "Given the passage of time, and the evolving nature of the advisory industry and our regulatory system, I believe it is appropriate for us to re-propose Form ADV Part 2 so that we can receive a fresh set of comments on its form and content," he said.
Trading. Donohue said that he has asked his staff to focus on soft dollars, portfolio trading practices, and best execution. He noted that fund boards, as well as SEC Commissioners, have requested additional guidance to assist fund boards and others with their responsibilities in these areas. "The Division staff is working to do our part on this initiative," he said. "We would like to provide guidance that would enable fund boards and others to have a meaningful dialogue with fund managers on soft dollar practices, as well as the adviser’s philosophy with respect to brokerage and trade allocation. This is an important dialogue for advisers and their clients to have — and the dialogue should be ongoing."
Donohue cautioned advisers and their clients against considering soft dollars in isolation. Instead, he said, they should focus on how soft dollars influence the overall practice of how an adviser places trades and whether the adviser is meeting its best ex obligations. He also noted that a firm’s best ex inquiry should not be limited to equities: "There are best execution challenges in other asset classes as well, including fixed income," he said. "In addition, best execution inquiries should be made across all accounts and products, each of which, including separately managed accounts, may have its own best execution issues and challenges."
Hedge funds. Donohue reported that the IM staff is working on a new Advisers Act rule that would apply the Act’s anti-fraud provisions to investors in hedge funds. Such a rule is necessary to reverse a "side effect" of the Goldstein decision, he noted.
Other themes. Donohue highlighted his industry background, expressing hope that his thirty years in the business would make him a more effective regulator. "I have much in common with you," he told the audience of advisory firm compliance professionals. "I hope my experience will enable me to evaluate regulatory reforms from the perspective of determining which regulations add value and meaningful protections for investors, and which could be enhanced."
Donohue also acknowledged the diversity of the advisory industry, a theme that has been repeatedly emphasized over the years by the Investment Adviser Association. "I am very mindful of the fact that SEC-registered advisory firms include well-known mutual fund and institutional advisers that are affiliated with large international financial services firms, as well as smaller regional, or even local, firms that provide advisory services for friends, neighbors, and families," said Donohue. "Our challenge as regulators is to develop an effective regulatory regime that is workable at both ends of the spectrum — and all of the firms in between."
Donohue concluded by noting that one of his goals is that his tenure be marked by a "healthy and productive dialogue" among the SEC staff, the advisory industry, and advisory clients. "Together," he said, "I believe we can institute some positive, meaningful regulatory reforms."