Checking in with Division of Investment Management Director Buddy Donohue
In an exclusive interview with IM Insight, Buddy Donohue talked about the changes and challenges he faces in his new role as director of the SECís Division of Investment Management.
So far, it sounds like heís happy with his career move. "I donít think thereís been a day where I havenít walked out at the end of the day a lot smarter than I walked in," he said. "I donít know how many people can say that about their job."
Donohue noted that "a lot of people want to know what my agenda is." To that end, he described his September 25 speech as his "wish list of things Iíd like to go and tackle." However, he cautioned, "it doesnít mean itís the Commissionís wish list." And, he added, thereís always the possibility that "other stuff jumps up and gets in the way."
So whatís it really like for a former industry lawyer to finally be on the inside?
The most surprising aspect of his new job, said Donohue, is the variety of issues he faces. Most people tend to think of the Division of Investment Management as simply overseeing mutual funds and investment advisers, he noted. However, in the six months since he joined the Division, Donohue has worked on projects involving BDCs, hedge funds, ETFs, and closed-end funds. "Thereís so much more thatís going on," he said. "Itís a lot of interesting stuff."
Donohue added that he was "very pleased" to discover first-hand how strong the Division staff really is. In contrast to the sharp criticism lobbed at the SECís professional staff by certain industry lawyers at recent conferences, Donohue had nothing but praise for his new colleagues. "Thereís an incredibly talented staff here," he said. "They run so deep on everything." When an issue comes up, he said, "it doesnít take me long to get the full history of how it evolved, what happened, and what the concerns are." He analogized his job to putting together the puzzle pieces: "I have people who know ó really deep ó each one of the pieces."
In addition to learning from the "really talented people" on the staff, Donohue said that he appreciates the opportunity to learn from "a lot of talented people" in the industry who come in to discuss "things they are doing or that theyíd like to do." Donohue said he enjoys discussing innovative products and interesting issues where the Advisers Act or the Investment Company Act "might not quite fit what they might want to do." In dealing with such issues, he said, his approach is to ask himself: "What am I worried about? Why do I worry about it? What are the regulatory implications? Is this something they should be able to do?" While he might have "a pretty good sense" of why somebody wants to do something for business purposes, "now Iím on the side saying, ĎOkay, but should somebody be able to do this?í"
Clearly, Donohue is settling into his new role as a policy maker. "I love the different perspective," he said. "I used to look at things from the perspective of the firms that I worked with," without necessarily appreciating the wide range of firms in the industry or the different practices and challenges that they face. "Here," however, "if we are thinking of doing a rule, or if thereís a practice out there that weíd like to think about or address, or if thereís some exemptive relief that we may be thinking of giving, part of the challenge Ö is how do you get it right so it works across the broad spectrum?" In the adviser space, he noted, thereís over 10,000 advisers, in all shapes and sizes. "How do we get it right so whatís workable for the large firms is workable for the small firms?" he asked. "Itís a real challenge," he added. "I love thinking about it."
Of course, every job has its downside. For Donohue, it seems to be the feeling of being out of touch with the industry. "Just by the nature of what my job is, my relationships with people have changed," he explained. "I kind of miss that, but I knew that was what came with the job." In his past life, he said, it was "very easy" to figure out what was going on in the industry. "I could pick up the phone and people would tell me." However, "as time goes on, I lose those connections." Because heís now a regulator, his former colleagues are "less likely" to sit down and say "You know, I have this real challenging issue Iím facing," said Donohue. "Weíre not going to have that conversation."
Similarly, they also are less willing to be candid or critical. In the past, said Donohue, if he gave a "lousy" speech, his friends would tell him. Now, he said, "nobodyís going to come and say ĎBuddy, that was terrible, what are you talking about?" While heís encouraged his "really good friends" to continue to provide such feedback, he acknowledged that "even they are going to be a little restrained."
Undoubtedly, Donohueís not the first regulator to feel lonely at the top. Despite efforts to foster communication between the SEC and the industry, thereís long been a general industry view that the less interaction with the SEC staff, the better. For example, a firm that faces a compliance issue might be reluctant to raise it with the staff, for fear of triggering a mini-sweep exam. "That was always my concern," Donohue admitted with a laugh, adding that he was also concerned about triggering a targeted exam. However, now that heís on the staff, he has a different perspective. "One of the things about sweeps that I actually have a better appreciation of now" is their role in educating the SEC staff about industry practices. "How do we fulfill our regulatory obligations if we donít know what is going on in the industry?" he asked. "I think thatís a balance that we need to get right, because it really is dangerous if weíre trying to regulate an industry that we increasingly donít have a connection to."
To that end, he urged firms to share their concerns and questions with the staff: "If I knew back then what I know now, I think I would have come in more frequently to talk to the SEC about challenges we were facing." The staff, he said, "wants to know what is going on out there to help craft solutions for the industry." They are "very willing" to think about issues, he added, seemingly to assure firms that they wonít trigger a knee-jerk regulatory response. "Thereís a lot of thoughtful debate that goes on" before policy is made, he said. In fact, he said that upon joining the SEC, he was pleased to find an established set of controls around the policymaking process. "If we think something should be done," there is a "whole process" before it winds up being approved by the Commission, he said. "I donít think people have an appreciation for that on the outside."
Like former SEC Chairman William Donaldson, Donohue is being watched closely to see how he transforms from an industry person to a regulator. Donohue indicated that he already has undergone such a metamorphosis. "Iíve found my view of things evolving as my perspective has changed," he said. When he was in the industry, he said, he had a different perspective on regulatory issues. "It wasnít that it was wrong," he said, "but it was the perspective of a regulated person." But even back then, he said, he recognized that he would probably take a different view if he was at the SEC.
And, sure enough, his new responsibilities have changed some of his perspectives. For example, Donohue said that when he was in the industry, he always knew that the books and records rule needed to be addressed. Now that heís looked at the rule from his new perspective as regulator, however, he is "probably more likely to want that to be a more fulsome rule than I would have coming from the industry," he said. As a regulator, one realizes that "if we donít [take] that broader view," certain types of "bad things" may be missed. The question, he said, is "do you want to set it up so that you are definitely missing those things?"
Donohue indicated that he still will bring his prior industry experience to bear when making policy. When coming to the SEC from the industry, "you have your prior experiences," he said. "You donít lose them, but Ö all of a sudden you are looking at something with kind of a different slant." As a former industry participant, he added, he has an appreciation of what it takes to implement an SEC rule. To that end, he emphasized the need for the SEC staff to provide guidance to people on how to comply with new requirements. "Thatís an important element," he said.
Donohue hinted that his former industry experience may cause him to be even less tolerant of questionable practices. Having worked in the industry for so many years and seeing so many "good people" endeavoring to get things right, Donohue mused that he might "wind up being somebody who is harshest on people" who are not making an effort to do the right thing. "Iím not sure Iím going to be as sympathetic as some others might be where people arenít trying to get it right," said Donohue. "I donít want to be harsh about it, but itís kind of what I come with. I have a fair amount of knowledge about how things work, how people do things, and how people make decisions." While he has "incredible respect" for all the people in the industry who are trying to do it right, he speculated that he "wonít have a lot of sympathy for those who have not been trying to do it right."