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Chief Compliance Officers, Self-Regulation Among New SEC Cries


Saying that the gigantic growth of the fund industry has stretched its resources to the limit, the Securities and Exchange Commission asked fund companies last Tuesday to consider appointing chief compliance officers and put internal compliance programs in writing. More significantly, the SEC asked the public and the industry to comment on the creation of a mutual fund self-regulatory organization (SRO), much like the National Association of Securities Dealers, to work in tandem with the SEC.

"Like cops on the beat, we cannot be everywhere at all times," SEC Chairman Harvey L. Pitt said when proposing the changes. Although the mutual fund industry controls $6 trillion in assets, combined with their investment advisors, this is a $21 trillion industry, Pitt said.

"Unlike the brokerage industry, we have sole oversight responsibility for the 5,000 investment companies and 7,800 investment advisors that are registered with the commission," Pitt said.

Don't Fix It'

"If it isn't broken, don't fix it," the Investment Company Institute retorted, in a written statement.

"We remain deeply skeptical that developing an organization requiring mutual funds to assume significant responsibility for regulating themselves is wise or necessary," the ICI said. The industry thinks the SEC has been doing an adequate job on its own of "keeping the industry free of systemic scandal for more than 60 years," the ICI said.

Comment on the proposed new rules will extend within 60 days of their publication, shortly, in the Federal Register.

Commissioner Paul S. Atkins was the sole dissenter during the SEC's SRO debate. Atkins not only questioned whether such an organization would simply "impose another layer of regulation" and prove as inadequate as self-regulation in the accounting industry, but he challenged his fellow commissioners to explain where they found the authority to create such an entity. Noting that Congress explored and dropped the idea of a mutual fund SRO, Atkins asked, "Where do we have the legal authority?"

The cost of formalizing internal compliance controls, along with a chief compliance officer at each fund complex, was another concern. An economist from the SEC said he had estimated that the total time it would take the industry, collectively, to comply each year would be nearly one million man hours - 332,000 hours for funds and 623,000 hours for advisors - but had not converted that into dollar terms.

Faster, Fewer Inspections

Lori Richards, director of the office of compliance, inspections and examinations, noted that if fund companies had formal compliance procedures in place and a self-regulatory agency that could highlight potential areas of weakness to the SEC, it would decrease firms' legal costs and, in all likelihood, speed up SEC inspections.

"These are simply ideas," continued Paul Roye, director of the division of investment management. "Our charge from the chairman was to enhance oversight of the industry and come up with ideas that we think are appropriate for a public dialogue."

As for his own opinion of such a body, Pitt seemed to weigh heavily in favor, saying, "We simply can't afford to wait for other storms to break.

"There is a critical need for the commission to become more proactive in its investor protection mission," he said.

Depository Update

Meanwhile, the SEC also voted unanimously last week to update 25-year-old rules and regulations regarding securities depositories. The rule amendments will take effect 30 days from their date of publication in the Federal Register.

Pitt noted that when the rules were first put in place in 1978, they were considered "an innovation designed to solve the problem of retaining securities as paper certificates." Today, with 97% of all stock certificates held in a central depository, as a standard operating procedure, the SEC saw fit to ease depository compliance burdens on fund companies and their boards, Pitt said.

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