Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

ICI Again Seeks Oversight of Folio Products


The Investment Company Institute of Washington D.C. has taken the unusual step of submitting a follow up letter to an earlier request that the Securities and Exchange Commission regulate portfolio products like mutual funds.

This is only the second time the ICI has submitted a second letter to the SEC on the same issue and the first time that it has called such a letter a "Petition for Rulemaking," an established form of appeal to the SEC, according to John Collins, an ICI spokesperson.

In the so-called petition to Jonathan G. Katz, secretary of the SEC, dated March 28, Craig S. Tyle, general counsel for the ICI outlines what the ICI would like included in a rule that would regulate some portfolio products under the Investment Company Act of 1940.

This is the second time the ICI has urged the SEC to regulate the products like funds. In July, the ICI sent a letter to the SEC saying that certain portfolio products should be regulated like funds because they offer the same advantages but have none of the protections of products regulated by the 40 Act.

Because the SEC has not responded to the letter, the ICI decided the issue was important enough to issue a so-called petition for rulemaking, said Collins. In the months since the ICI sent the SEC its letter, several companies have announced they will offer portfolio products, including Fidelity of Boston and Charles Schwab of San Francisco, he said. The ICI is concerned that if the SEC does not move quickly to regulate the products, it may be faced with having to retroactively regulate a sub-industry, Collins said.

"There isn't a date on this," Collins said. "We are asking simply that they act expeditiously so that there isn't a long growth of these products."

The petition outlines what the ICI would like included in a rule. The SEC should develop a rule that uses three criteria to determine if portfolio products should be regulated under the 40 Act, according to the petition.

The first and second criteria would be that the products are pre-fabricated model portfolios that investors can purchase in a single transaction and can make a limited amount of changes, based on changes a professional manager made to a model portfolio. The third criteria would be that the products offer trading services, like the issuance of fractionalized shares, that investors would rely on to make purchases for or changes to their portfolios, according to the petition.

The ICI's petition is a reaction to a product it perceives as a threat to the mutual fund industry, said Nancy Smith, vice president of investor education with FOLIOfn of Vienna, Va., and a former SEC official. FOLIOfn acts like many other brokers and should not be considered an investment company, Smith said.

The ICI's argument against FOLIOfn and other portfolio products rests on a far-fetched legal theory, she said.

The attention the ICI is giving the products may actually help the products, according to Jonas Max Ferris, CEO of MaxFunds.com of Ann Arbor, Mich. MaxFunds offers several model portfolios but does not offer brokerage capabilities. The firm was named in the ICI's petition as providing a professionally managed, pre-packaged portfolio. By repeatedly requesting that the SEC look into regulating the products, the ICI may be generating more attention for them and may unwittingly be producing a positive perception of them, he said.

"The upshot of this is it's generating a lot of attention and I think when the fund industry starts throwing its weight around, it may wind up hurting itself," he said.