The head of a fund-industry trade association and an SEC commissioner are among those urging fund-industry executives to double their efforts to work with standoffish SEC staffers and, when necessary, band together with peers to make their voices heard by regulators.
Fund industry companies have always been willing to provide comments or feedback on new-rule proposals but have not been eager to band together publicly to oppose regulations or other influences that could endanger the industry as a whole and the millions of small investors that rely on it, according to Eric Pan, CEO of the Investment Company Institute (ICI) during a March 20 speech at the start of the ICI’s Investment Management Conference March 19-21 in Palm Desert, Calif.
The pace and scope of the SEC regulatory effort has made it difficult for investment companies to be sure their objections are heard and considered if they provide feedback in the traditional way, by responding on their own behalf to each individual rule proposal, during the short public-comment period available, Pan said.
It would be more effective for investment companies to coordinate their individual responses with the collective responses provided through industry associations such as the ICI and Independent Directors Council (IDC). It would be even more effective to take the next step by accelerating the effort to suggest “policies t
hat will do the most good for the most people, as well as critiquing rules and regulations that risk hurting investors,” Pan said.
ICI and IDC had some success with mass-response tactics as part of the effort to oppose the swing-pricing rule the SEC proposed in November.
Both organizations followed the traditional response methods, which included a 180-page analysis and several other comments filed with the SEC, then followed up with a series of public comments, press releases and private conversations with member companies that resulted in a major increase in the volume of individual comment letters to the SEC’s cache of feedback. ICI and IDC also published summaries of their objections that made the problems easier to understand, quotes and objections from other industry associations, including the American Bankers Association, Consumer Federation of America, ERISA Industry Committee and SIFMA, to show how that opposition to the swing-pricing proposal extends far beyond the fund industry.
The effort also scored an unprecedented success – comment letters signed by all the members of more than 30 fund boards, many of which were able to share and build on the work of the others rather than write a full analysis themselves. Others, including the Neuberger Berman Funds, wrote a full analysis and showed that comment was part of a coordinated effort among many companies, by stating the board’s agreement with and providing links back to more detailed responses from IDC and the Mutual Fund Directors Forum.
“Trustees don’t usually prefer to get involved so directly,” according to Thomas Kim, president of IDC said of the effort.
“It’s quite striking,” said Paulita Pike, partner at Ropes & Gray LLP, who spoke during a March 20 ICM conference panel on the pace of SEC rulings.
“That is the first time in the history of the industry that many boards have weighed in on an issue that had nothing to do with governance,” Pike said. “What I hear from directors is that they have a single constituency, the investors, so they really hope the commission will take their comments seriously.”
A group of independent directors and IDC staff added weight to the fund board’s efforts by meeting in person with Commissioner Mark Uyeda the day after Uyeda spoke at the ICI conference. ICI has done the same with groups of its staffers and member companies, according to the list of meetings between SEC staffers and members of the public that is maintained at the bottom of the proposal’s public-comment page.
A high volume of public comments, augmented by in-person meetings might reinforce the industry’s message on one proposal but relatively few rule proposals get that much attention from the industry, according to Sarah G. Ten Siethoff, deputy director of the Division of Investment Management and associate director for rulemaking, during her appearance March 20 on an ICM conference panel discussing the pace of the SEC’s rulemaking.
“This is an area where I encourage the audience to become more engaged,” she said. “I will say from having looked at some of those comment files, that they’re often pretty sparse.
“You guys are half the market, you know? There is the sales side and the buy side, so you’re half the market,” she said, addressing an audience of fund-adviser executives, fund-board trustees and the lawyers who advise them both. “It’s a little surprising to me because I think some of these changes could have pretty impactful results. So my first remark is that I honestly think you should be a little bit more engaged on some of these rulemakings.”
Encouraging more engagement and a more consistent flow of comments from investment companies and fund boards is a big part of ICI’s strategy, but the change that primed the industry’s pump even before the swing-pricing proposal made the issue critical were due to a change in approach by the SEC, not a lack of comment from industry.
“Since its founding, the SEC has kept watch while retirement and financial security became attainable goals for tens of millions of people from all walks of life,” Pan said. “But the SEC’s current approach stands in contrast to its history.”
Pan is right, according to SEC Commissioner Mark Uyeda who said during his keynote at ICM that “the SEC has been focused on rule-makings based on unrealistic expectations of how the world functions and how it ought to be.”
The swing pricing proposal is a good example of that process, whose risks Uyeda called “the perils of regulation by theory and hypothesis,” because it assumes a universal hard close would pose few problems and “looks to Europe and academic papers envisioning systems completely different from the U.S. experience.”
Pan said any disconnect between the SEC and the companies it regulates did not originate with the IDC or registrants – or at least has not had any reason to change significantly for the worst recently. There is a noticeable widening of the gap created by changes in priorities and behavior of regulators, though not one so wide it can’t be bridged with a little effort.
“This is my hope coming out of this conference,” Pan said. “That the private and public sector can unite in common cause and continued progress.”
