WANTED: 220 to Oversee $44 Trillion
July 13, 2012
There is a new sheriff in town for the mutual fund industry-and he may need to borrow money for bullets.
On July 9, Norm Champ took the reins of the Investment Management Division of the Securities and Exchange Commission. He succeeds former Goldman Sachs global investment officer Eileen Rominger, who is retiring after 18 months at the division's helm.
Champ-who deferred interview with Money Management Executive until he could get his feet wet-takes over a 180-person division. With luck it may reach 220 next year. This relatively small division faces a flood of new challenges, new responsibilities, and an increasingly nervous fund industry.
"You have a runaway Congress that is implementing into law some good ideas, and some bad ideas, with very little thought as to cost," says Ron Geffner, a partner and head of the Financial Services Group at the New York law firm Sadis & Goldberg.
Noting the tight budgetary constraints and growing responsibilities for all SEC divisions, Geffner warned that "we're setting up one of our more prominent agencies to what I would regretfully say is almost certain failure."
The Investment Management Division oversees the $44 trillion investment company and investment adviser segments of the financial services industry, according to SEC reports. That includes the $13 trillion managed by the investment company industry, including mutual funds, closed-end funds, unit investment trusts, exchange-traded funds and many other products.
Its official responsibilities include minimizing "financial risks to investors from fraud, mismanagement, self-dealing, and misleading or incomplete disclosure."
The division attempts to live up to this mandate through a plethora of tasks, according to Aisha Hunt, head of the '40 Act practice at the San Francisco law firm Cole-Frieman-Mallon & Hunt. It helps the SEC itself in the development of regulations for enforcing new laws as well as the interpretation of these new laws and regulations for the public, as well as inspection and enforcement staff.
The division ensures disclosures are useful to retail investors, reviewing investment company and adviser filings. It handles administrative chores such as responding to no-action requests and requests for exemptive relief to launch new funds.
The division is also now on the frontlines of a number of regulatory battles affecting the fund industry. Champ's troops have been charged with helping develop money market fund rules that might, among other things, require "floating" Net Asset Values (NAV), a capital buffer for these funds, and limitations on redemptions. Hunt says there is currently a stalemate at the SEC regarding these rules, which Commissioner Mary Schapiro is championing.
The headaches don't end there for the division. It also has to duke it out with assorted interest groups on regulatory debates related to the Volcker Rule, which would ban banks from speculative investments; the use of derivatives by investment companies; adviser performance fees and incentive-based compensation arrangements; 12b-1 marketing fees, among many others.
Industry legal experts say the future health of the industry rides on many of these decisions.
"You worry that they can potentially kill the money market fund industry," says attorney John McGuire, a partner at the lawfirm Bingham McCutchen. "You worry that they are going to do something that doesn't make sense with derivatives, so that derivatives will no longer be a tool available to investment companies."
The universal worry: the division doesn't have the resources to handle all its tasks.
Consider, the division had 180 positions in 2012, running on a budget of just over $51 million. It is fighting to grow to 220, with a budget of roughly $62 million next year.
In comparison, the agency's Enforcement Division had 1,354 positions in 2012, while Compliance Inspections and Examinations had 968. Corporate Finance had 515 and Trading and Markets 307.
When asked if the division had enough resources to fulfill its mandate, Anna Timone, general counsel and chief compliance officer for the $4 billion alternative asset management firm DIAM USA, declared "No! Definitely not."
Timone says that the division needs to hire top-quality experts, such as former analysts, traders, portfolio, operations and risk managers who "know how the industry runs on an operational level and risk level,...especially risk."
"The investment management industry is [a multi] trillion dollar industry that's driven by highly competitive views, capitalistic ambitions and very bright people. In addition, we are in the middle of the global recession that naturally only further breeds this 'cut-throat' environment. On top of that, we have a mass body of law that is pure quantity and not quality," Timone said.
"In order to give any beneficial structure to this massive code and apply it effectively to a trillion-dollar industry, SEC needs to recruit quality experts who are not lawyers, not MBAs, not bureaucrats and certainly not politicians," she added.
An understaffed and embattled division could hamper further innovation, according to Michael Mundt, a partner at a Philadelphia law firm who worked at the Investment Management Division for 13 years.
Case in point: new products such as exchange-traded funds. Mundt said that one of the ongoing challenges for the division is to use its exemptive authority to permit innovation while still ensuring investor protection.
"If the division gets it right, investors and the fund industry can benefit from new products and services. In the wake of the financial crisis, however, and at a time when the SEC is under intense scrutiny, the division may not always have the resources or the motivation to break new ground," he said.