SEC's Andrew Donohue Takes Measured Approach to Changes
Custody rule and target-date funds high on agenda.
August 17, 2009
The commissioners and staff at the Securities and Exchange Commission have been working around the clock, looking for ways to refine and improve regulations in the aftermath of one of the worst recessions in history, but this important work takes a delicate touch. Changes to one area could have unexpected ramifications to other areas, and every move must be planned with care and consideration.
The SEC's Andrew J. "Buddy" Donohue, director of the division of investment management, is known for his cautious, measured approach. Donohue recently spoke with Money Management Executive and revealed his insight into the Commission's progress to reform summary prospectus profiles, target-date funds, money market funds, custody rules for investment advisors and the use of complex, risky instruments.
MME: How popular and helpful do you expect summary prospectuses to be among investors?
Donohue: I expect them to be extraordinarily helpful. There was an incredible amount of preparatory work that went into developing the summary prospectus. We worked very closely with investors, the investment companies and broker/dealers to understand what it is investors would like to see. There was incredible similarity in the types of information that brokers found useful in terms of talking to their clients and the info that had been developed for the profile.
We also looked at information that retirement plan and 401(k) investors were using and found that the information was very similar, if not identical to, the information we were suggesting.
I think we've identified the important information that folks need to make an initial decision. We have created a mechanism for individuals and their advisors to easily navigate from the simple information to the more detailed information that's provided in the full prospectus and the statement of additional information. The feedback that we're getting has been very positive.
MME: How is the SEC working to modernize fund and advisor regulations?
Donohue: In addition to the summary prospectus, we are looking at data tagging for risk/return information in the annual and semi-annual shareholder reports. We think that will be a helpful tool for investors for comparison purposes.
If you've ever picked one up, they are rather lengthy. They're patterned after corporate annual and semi-annual reports. We've been hearing for years that a lot of people just throw their annual and semi-annual reports in the garbage. The cost of printing them is borne by shareholders.
If we came up with a document that they would actually read, that would be helpful and would save investors money at the same time.
On the advisor side, last year we proposed Form ADV part II. It was intended to be a narrative that would be much more useful, easier to understand and more meaningful to investors. It would also be electronically available.
Let's say you were considering hiring an investment advisor registered with the SEC. If you went online, either on the SEC's website or the website for that advisor, you could not see their brochure. You could see their ADV part I, which has a lot of information relative to the advisor itself, but you wouldn't get the other really important information unless you called them up [to ask them] to manage your money.
As revised, ADV part II would do a couple things: One, it would make the filing of those brochures electronic, and secondly, it would make the forms themselves much more meaningful and understandable for investors.
MME: What are you doing about books and records?
Donohue: That is a huge task for us, part of our longer-term plans. Those rules were written in the '60s. When I was an economics major in college in the '60s and '70s, we didn't have access to a computer.
The world has changed dramatically since then, and the way that firms create, maintain and access their records is significantly different. Back then, anything electronic was the exception. Now, anything paper is the exception. It's an important initiative for us, but it's more important to do it right, and we are acting in a quite deliberate manner.
To give you a sense of the universe, we have over 11,000 investment advisors managing $33 trillion of investor money registered with us. They run the gamut from the huge firms that we all know about to the very small. The latest figure I saw said that about 69% of advisors registered with the SEC have 10 or fewer employees. There are a number of what we call dual-registrants, firms that are both advisors and broker/dealers at the same firm.
As we think about the advisor space, we always have to be mindful of how the large and small advisors currently keep their records and how we could harmonize the rules with those of broker/dealers.