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Week in Review

SEC May Put Cap on Derivatives Exposure

The Securities and Exchange Commission is concerned that some mutual funds and actively managed and leveraged ETFs, in particular, may be investing too heavily in swaps and derivatives. If the staff determines that the investments are inconsistent with the leverage, concentration and diversification provisions of the Investment Company Act, it will cease granting exemptions going forward. Funds that already received exemptions would not be impacted, the SEC said.

The Commission recently issued an investor warning on leveraged ETFs, and advisors have responded by clearly explaining the risks involved with investing in leveraged ETFs beyond one day.

"Although the use of derivatives by funds is not a new phenomenon," said Andrew Donohue, director of the Division of Investment Management at the SEC, "we want to be sure our regulatory protections keep up with the increasing complexity of these instruments and how they are used by fund managers."

The SEC will also investigate whether funds with derivatives holdings maintain and implement adequate risk management, pricing and liquidity, and if their boards are providing appropriate oversight. Further, the SEC will examine whether prospectuses adequately address the particular risks created by derivatives. If necessary, the SEC will impose additional reporting requirements on such funds.

Fido to Advertise on iPad

Well ahead of Apple's iPad launch last Friday, advertisers were jostling for their places on the new tablet. Time magazine signed up Fidelity Investments, Unilever, Toyota Motor and three other leading companies, The Wall Street Journal reports. Each Time contract is worth $200,000 apiece. By comparison, The Journal has signed up six advertisers, including Coca-Cola and Federal Express, for a four-month advertising package for $400,000.

Advertisers are reportedly drawn to the interactivity, video, flash, social networking, navigation, touch technology, downloads and even games that can be embedded on the iPad. Conde Nast's Wired magazine, for instance, is offering different levels of this type of functionality to advertisers. For video, the magazine is asking advertisers to commit to eight ads in a single issue. The Journal did not indicate the pricing structure.

Rep-as-Adviser SMAs Up 29% Since 2007

The number of managed accounts in rep-as-adviser programs increased 29% from 2007 through year-end 2009, but because advisers are required to contact clients every time a change is made to these non-discretionary portfolios, managed accounts are inefficient, Cerulli says.

Thus, while SMAs are expected to continue to grow in the double digits in 2010, capacity and scalability will slow long-term growth, the research firm says. And not all programs will benefit equally. Take the market downturn. In that period, home-office programs, despite their penchant for diversification, took the hardest hit, while rep-driven programs thrived.

Technology Advances UMAs for High-Net-Worth

Along with turnkey asset management programs, which allow advisers to outsource functions such as manager research, portfolio construction and performance reporting in order to gain operational and cost efficiencies, unified managed accounts are gaining popularity.

Celent Research says UMAs are the fastest-growing segment in the managed account industry and are the future of managed accounts. Celent projects UMA assets will reach $327 billion by 2013, representing a compound annual growth rate of 35%.

Through these programs, there is automatic diversification so advisers don't have to worry about asset-reallocation, and both the adviser and the client are able to monitor the account in real time. Other benefits: the UMAs offer a wider choice of asset managers. Efficiencies help keep costs down for client and adviser. And advisers like the transparency the UMAs offer "because they can gain complete visibility on all their client's financial assets," according to Celent.

Not all overlay technologies have proven themselves equal, though. Technologies have improved, which have allowed UMAs to be used with more mass-affluent clients, but they still have room to improve even more.

Tom Steinberger, a senior vice president at Fiserv, said that as more wealth managers and banks move to an open architecture platform they need someone to "manage the managers."

"That's the next evolution of our business," he said during a recent discussion at the American Bankers Association conference in Phoenix. "Our technology allows for multiple managers and someone to oversee and take responsibility for what they are doing."

This is especially important for high-net-worth clients who tend to have many advisers who do not talk to one another. "We'll continue to see this technology evolve further," Steinberger said.

Fidelity Helps RIAs, B/Ds With Cost-Basis Reporting

New requirements from the Internal Revenue Service on cost basis reporting could present both challenges and opportunities for advisers and broker/dealers, according to a whitepaper from Fidelity Institutional Wealth Services.

Although the new requirements don't take effect until Jan. 1, Fidelity is encouraging advisers and broker/dealers to begin the process of incorporating the new rules into their current tax reporting workflow.