What's It Like Over There?
Whatís it like to work in the SECís Division of Investment Management these days?
From the outside, at least, things seem quite tumultuous. Rocked by the mutual fund market timing scandal, and with Congress watching closely, the division pushed through rulemaking after rulemaking at a breakneck pace. For the most part, the scandal-driven rulemaking blitzkrieg is over.
However, the agency now finds itself faced with three separate lawsuits challenging Division of Investment Management rulemakings. Moreover, the division routinely faces challenges from within the agency, in the form of direct and indirect public criticism from Commissioners Cynthia Glassman and Paul Atkins, and by less-public frictions with the Division of Market Regulation.
The most recent example of the former: Glassman and Atkins sent a letter over to Capitol Hill last week expressing their displeasure with IMís report on the independent chairman rule. The report, said the two Commissioners, failed to respond constructively to the relevant Congressional inquiry (incorporated in an appropriations bill), and "offers no evidence to support its premises." They noted that the report was prepared by the very same staff who put the rulemaking together in the first place.
Repeating a theme they have raised before, Glassman and Atkins complained that they were not consulted early enough in the process. "Unfortunately," they said, "we were not given at any point in the process an opportunity to provide constructive input on what we would consider a responsive report."
In the midst of all this, Chairman William Donaldson is actively recruiting a new division director to replace Paul Roye, who has been widely reported to be joining Capital Research & Management (headed by Investment Company Institute patriarch Paul Haaga). Interestingly, the appointment of a division director is not entirely up to Chairman Donaldson. Under the applicable law, "the appointment by the Chairman of the heads of major administrative units under the Commission shall be subject to the approval of the Commission." In other words, all of the SEC Commissioners, including Glassman and Atkins, will be required to approve any new director selected by Donaldson.
On that score, the SEC Commission itself will soon be needing a replacement for outgoing Commissioner Harvey Goldschmid, who plans to return to teach at Columbia Law School in the next few months. If a pro-business Commissioner is selected, he or she will form a deregulatory triumvirate with Glassman and Atkins that will effectively put a break on Chairman Donaldsonís pro-regulatory impulses.
As Goldschmid himself acknowledged last week, the Commission "is very delicately balanced right now." The choice of his successor, he said, "is a matter of great consequence." He urged his audience, the Council of Institutional Investors, to demand a new Commissioner "of the highest quality who will work well with Chairman Donaldson."
And that, in a nutshell, is the environment that the Division of Investment Management is operating in. "Things from the outside look like they are in upheaval," said one former division staffer. "Obviously, the SEC has had major challenges in the past couple years" and has operated "under enormous pressure."
To get the inside view on whatís going on, IM Insight spoke to several current Division of Investment Management staffers:
"It has been a rocky road for a long time for IM," said one staffer. "Since Harvey Pitt was here, we feel that there has been a lack of trust that has infected the sixth floor," he said. "Itís Commissioners not wanting us to do anything, not being confident that we can do things properly and not abuse discretion." That, he said, "is a joke" since the Commission "only knows what the staff brings to its attention." Because some of the Commissioners "really have embraced that lack of trust," it has made it "very challenging for us to do the things that are helpful to save costs for the industry and at the same time protect investors."
He added that Pitt "got the staff embarked on self-psychoanalysis," which he described as "not productive." He said that there has been too much emphasis on process and self-reflection, and not enough on "actually doing stuff."
However, "the worst of the worst" was when the Canary scandal broke and the investment management industry became tarnished. "Everyone here, because they care about what they are doing, felt tarnished," he said. "People here were upset by what happened."
He said that the level of IM support for the various resulting rulemakings coming out of the Chairmanís office varied. There was an "understanding that we all had to do what the Chairman wanted," and be "good soldiers," doing what had to be done within the deadlines given.
A second staffer (who prefaced his remarks with "let me close my door") said that the discovery of the market timing scandals "was a blow" to his view of the divisionís effectiveness. However, he had strong praise for the Commissionís response to the crisis, which he described as involving "some deep soul searching about what type of regulatory response would be appropriate." In situations like that, "itís incumbent upon the staff to work as hard as they can," he said. "This is why they call it public service." The staffer said that when the scandal broke, he immediately recognized that the next "one to two years of everyoneís lives in the division" were going to be very work-intensive. And they were. "Iím proud of us for getting though as much as we did," he said.
And then came the lawsuits. The first staffer described them as "inevitable," given that some of the rulemakings were "incredibly unpopular." The second staffer said that he was concerned about the effects the litigation may have on future agency deliberations. The SEC, he said, "has been remarkably lucky for years that it hasnít had more of its actions challenged." Compared to the experience of other agencies, he said, "itís quite unusual." However, he expressed concern that some SEC staffers "have deluded themselves" that the reason the SEC had never been sued was that the Commission had always been right, and that the only time an agency is challenged is when it is really wrong. "Itís like the primitive people who thought it rained because you did the rain dance," he said. He expressed concern that the Commission might stop acting in an aggressive way out of a fear that it would be sued. "I see evidence that there are some parties outside the division that would espouse that kind of conservativism."
So, whatís next? The second staffer described the SECís response to the market timing crisis as moving into the "implementation and consolidation" phase. "We still have much work to do," he said. "I certainly donít feel like people have run out of gas and are looking for a way out."
There is certainly work to be done, at least from the industryís perspective. As the former IM staffer put it, some of the recent rulemakings "could probably benefit from a little bit of critical review." After the dust settles, he said, the staff should step back, take a deep breath, and "look a little more deliberatively at whatís been going on." While acknowledging that some of the steps taken have been necessary, he urged the staff to "reflect with a little bit more care on whether all of the changes made in the past couple of years are in the best interests of funds and investors, as well as the investment management industry, and do any fine tuning necessary."
Looking ahead, "I think that there are a lot of people here who are very hopeful for the future, more so than a year ago," said the first staffer. "People are looking forward." He noted that the division is getting ready to move into the SECís new headquarters. "I do think that the overall mood now is more positive," he said. "The worst of the morale crisis seems to be past us."
And, of course, the division will be getting a new director. "Hopefully, the next person to come in will combine the proper regulatory and the anti-regulatory perspectives, and just have an open mind," said the first staffer. He also expressed hope that the person will "know what is important and what to focus on."
He downplayed expectations that the division would be headed by someone with in-house experience. "Are we really hopefully that someone will come out of the industry? Not really." The concern, he said, is that the director will be a "second tier" lawyer. And, he added, "we donít want a screamer."
The second staffer said that the staff wants "the most energetic, most intelligent, most policy astute individual available." He noted that there are qualified individuals out there with those characteristics, and urged them to step forward. "Itís my hope that they will recognize that this is a real time for public service, perhaps more than any time in the past fifteen or twenty years." He said that he hoped that someone with a public service motivation would "put themselves out there," despite the "great personal sacrifice."
When will the next division director arrive? "Weíve been told Ďsooní," said the second staffer, perhaps as short as a month. Itís clear that acting director Meyer Eisenberg is serving in a temporary role. And, added the second staffer, "none of us are optimistic about much getting done until we have a new division director."
And no, no one on the staff seems to know who that next division director is going to be. The word among the staff is that the Chairman hasnít found anybody he likes yet because he wants someone with "stature." That, noted a third staffer, contrasts with the typical profile of an incoming IM division director, which she described as "a junior [law firm] partner who isnít paying for college anytime soon."
The second staffer noted that there might be another reason why Donaldson hasnít found someone yet. "Part of the reason they might be having a problem getting a division director is the way the Commissioners are currently conducting themselves," he said. "Any division director facing this particular panel is going to be constantly caught between Commissioners. Although the Commissioners often level their policy criticisms at each other, it is the staff, and in particular the division director, who suffers the consequences of it."
He characterized Glassmanís and Atkinsí stances as ideological. "I find time and time again that they are saying ĎWe shouldnít do this because we canít fix the problemí" although they do acknowledge that the identified problem, does, in fact, exist. He noted that Glassman routinely asks for studies to "disprove a negative." He acknowledged the traditional divide in government between pro-regulatory and de-regulatory approaches, but characterized that as a delicate balance in the financial services industry. Whenever there have been scandals, he said, "you can always trace it back to a hands-off, Republican-inspired regulatory rollback."
In his view, the SEC should forge ahead. "To say that we shouldnít be taking actions against problems because we havenít proven that the solution will be effective or that the costs are prohibitive is unacceptable in the face of the profits that the industry is still taking out."
The third staffer put it all in perspective, noting that there have been split Commissions in the past. "Everythingís cyclical," she said. "There are peaks and valleys. Itís always been like that."
In some respects, she said, the division is different from the "old days." Now, she said, "we look at every complaint very seriously [and] document everything."
In other respects, she added, "itís the same."