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News December 13, 2004 Issue

Roye Details Status of Investment Management Projects

In his keynote address at last weekís ICI Securities Law Developments Conference, Division of Investment Management director Paul Roye outlined the SECís regulatory agenda for advisers and funds. If you thought we were getting a breather, think again: "[I]t is quite possible that 2005 may rival 2004 in terms of the number and significance of investment management initiatives considered by the Commission," Roye said.

Soft dollars. The topic of soft dollars is "[o]ne of the most important initiatives that will likely receive Commission review in the coming year," said Roye. He described the recent NASD mutual fund task force report as "helpful," saying that the SECís soft dollar task force "will be paying particular attention" to the reportís recommendation that the SEC consider narrowing the definition of research under Section 28(e). He also said that the SEC staff plans to "closely examine" whether soft dollar disclosure can be improved, indicating that fund boards might receive disclosures that are "more detailed and comprehensive" than those received by fund investors. However, he added that "the question remains" of whether narrative or quantitative soft dollar disclosure, "or a combination of both," would be most helpful to investors.

ICI general counsel Elizabeth Krentzman, in her opening remarks, encouraged the SEC "to act promptly" on the NASDís mutual fund task forceís recommendation that 28(e) compliance be mandated for all discretionary advisers. Roye, however, did not indicate whether he is inclined to follow that approach.

Task forces. Roye noted that two SEC task forces are working on improving the information that the SEC receives about funds and advisers. The task forces, he said, are looking to "leverage technology" in order to obtain information from funds and advisers in a way that is simple for firms to provide, but still useful for the SEC staff. The task forces are part of Chairman William Donaldsonís risk-based approach to regulation. (News of the adviser task force was first announced by Roye at the July 14 SEC open meeting at which the hedge fund manager rule was proposed.)

Other adviser-specific items. Roye mentioned fee-based brokerage and Part 2 of Form ADV as "important initiatives" that will be considered in the adviser area.

The bulk of Royeís speech focused on mutual fund-related projects. Those that we can expect to see "in the near future":

Redemption fees. Roye said the staff is currently weighing a voluntary versus a mandatory approach to redemption fees, in light of commentersí concerns. "I believe that any rule in this area should be structured in such a manner that, if a fund board determines that a redemption fee is necessary for a particular fund to combat potential abusive market timing, the intermediaries selling the fund will work with the fund to facilitate collection of the fee," said Roye. He also said that the redemption fee rulemaking should address "the problem of omnibus accounts," so that funds have a means to identify market timers that may hide in those accounts.

Fair valuation. Roye said the staff is considering whether to recommend that the Commission issue "an interpretive release or other guidance" on fair valuation.

Hard 4:00. The staff is continuing to review the alternatives to a hard 4:00. The staff, he said, is looking at technological controls, perhaps combined with third-party audits.

Point of sale/fund confirms. Roye said that the staff is examining how best to get meaningful information to investors about broker conflicts and compensation, without overwhelming investors with detail and imposing prohibitive costs on brokers and funds.

Mutual fund-related projects we might see "in the coming year":

Portfolio transaction costs. "[T]he Division staff is not deterred" by the difficulty in quantifying transaction costs, said Roye, despite the fact that there is no single universally agreed-upon approach or method for measuring them. He acknowledged that narrative disclosure of costs could be "complex," whereas quantified disclosure could be "incomplete." He said that the SEC staff is closely reviewing public comments as well as the recommendations of the NASDís mutual fund task force in this area (last monthís soft dollar report also contained a short section on disclosure of transaction costs).

Review of mutual fund disclosure regime. Calling it "possibly [the] most important item" on the SECís upcoming mutual fund agenda, Roye promised a "top-to-bottom, full scale review of the mutual fund disclosure regime." (Seems like just yesterday that the SEC rolled out the new and improved Form N1A, doesnít it? But itís actually been six years.) Roye noted that the SEC has adopted several new mutual fund disclosure requirements in the wake of last yearís scandals, and Internet, e-mail and other disclosure mediums have seen "continued acceptance." Roye indicated that he would like the Division to take a comprehensive approach to fund disclosure, "focusing on more than just the mutual fund prospectus and [SAI], but all mutual fund disclosure vehicles, including annual and semi-annual reports, fund advertising, point of sale and fund confirm documentation, account statements, mutual fund websites, profile prospectuses, prospectus stickers, and disclosures made available on the SECís website and on request to investors." Roye indicated that a new fund disclosure regime could follow a "layered" approach, in which key information is provided directly to investors when making an investment decision or reviewing a fund investment, while providing access to more detailed information to "flesh out some of the details." Roye said that the timing and delivery method of various documents would be under review, in recognition of the "increasing and widespread use of the Internet as a means to make information available."

Rule 12b-1. Roye said that "one of the staffís ongoing concerns" is that investors do not adequately understand 12b-1 fees, noting that "[i]t is believed that the account-based approach to deducting distribution fees would help address this lack of understanding." He said that "any significant further changes" to Rule 12b-1 would be subject to the notice and comment process.

The exemptive application process. Roye said that he hopes the Division will soon implement a new regime for review of exemptive applications to streamline the processing of applications "that are on all fours with previously granted relief."

Other items in the pipeline:

  • the nature of eligible portfolio securities for business development companies,
  • a review of closed-end fund listing standards
  • final consideration of the manager-of-managers and fund-of-funds proposals.

Notably, Roye did not mention e-mails. However, IM Insight is hearing that the expected e-mail guidance could be issued as soon as early 2005. The document is expected to include guidance from both the Division of Market Regulation as well as from Investment Management.

And no, Roye didnít say anything about whether heís leaving.