Paul Roye, director of the investment management division at the Securities and Exchange Commission, ended nearly a year of speculation on Feb. 18 by announcing that he'll step down as the mutual fund industry's top regulator. The news rekindled a debate, however, over who might replace the mild-mannered Kentuckian and just what his legacy might be.

Roye won't officially depart the SEC until probably mid-March, a Commission spokesman said, adding that no timetable has been set to determine a successor and that "the search is in the hands" of SEC Chairman William Donaldson.

Roye said in a telephone interview that he decided to leave to pursue opportunities in the private sector. As of late last week, he had not accepted another job.

"I really haven't started looking," said Roye, who joined the SEC in 1998. "Right now, my goal is to take some time off and kind of decompress.

"I've accumulated a lot of leave by not taking a vacation through all that we've been doing. Maybe I'll go on spring break with my kids," he said with a laugh.

No one could argue that the 51-year-old Dartmouth College and University of Michigan Law School graduate hasn't earned a breather. Roye's tenure is marked most notably by the late-trading and market-timing scandal, a firestorm that culminated in Congressional hearings and allegations that the Commission had been asleep at the switch. At one point, New York Attorney General Eliot Spitzer, whose office first exposed abuses at Canary Capital in 2003, called for Roye's resignation.

Since the scandal broke, the SEC has delivered 13 separate rulemaking adoptions, proposals and concept releases and brought more than 15 enforcement actions against fund companies and executives. Those actions include an upcoming 4 p.m. hard close to the trading day, the creation of the chief compliance officer's position and a mandate calling for an independent board chairman along with additional independent directors. The SEC has also levied more than $2 billion in fines. Such swift, aggressive response to the scandal drew plaudits from the Senate Banking Committee, the House Financial Services Committee and the General Accounting Office, to name a few. Now the Commission's heightened oversight - which through additional resources has been nuanced to include a special risk assessment office, additional examiners, new technology and new ways of approaching fund surveillance - is turning to the rapidly growing and loosely regulated hedge fund industry.

In that segment, as Roye pointed out, measures like the Commission's Hedge Fund Advisor Registration rule "get out in front of problems and anticipate areas where there might be issues we have to worry about."

It's all combined to create an atmosphere where the next director must be ready to juggle a laundry list of new initiatives, according to David Tittsworth, executive director and executive vice president at the Washington-based Investment Counsel Association of America.

"Ultimately, what you need is a good manager," said Tittsworth, an attorney who has spent nearly his entire career in the public sector, including stints with each branch of the federal government.

Tittsworth declined to speculate on which names might be on Chairman Donaldson's short list, but he noted that recent history suggests it'll be someone with a strong legal background.

"Not just any attorney, either, but one that knows a lot about the Investment Company Act and the Investment Advisor Act. Although Chairman Donaldson himself is not an attorney, he understands the business and probably wants someone who's smart, diligent, hard-working - someone with an appreciation for the business," added Tittsworth, who learned of Roye's decision during a meeting with him the day of the announcement. "And the community of people that fall into that description is a pretty small fraternity."

At least one leading candidate, Henry Hopkins, the 62-year-old chief counsel, vice president and director of T. Rowe Price Group, has already declined the post. Martin Lybecker, a partner at New York-based Wilmer Cutler Pickering Hale and Dorr; Jay Baris, a partner at Kramer Levin Naftalis & Frankel in New York; and Jack Murphy, a partner at the Washington office of Dechert, are other names that have been circulated as potential candidates.

Roye, meanwhile, said he will recall his days as a regulator for the $8 trillion mutual fund industry with great satisfaction.

"I think we've done a lot of rule-making that will position funds to avoid some of the problems we have seen. We've tried to enhance the independence of the boards, tried to focus on the compliance infrastructure, code of ethics requirements . . . those things are designed to raise the standards of the industry so that we don't have the kinds of problems we've seen recently.

"Now we're trying to urge the directors that it's their turn to step up and implement what the Commission has laid out and make it real, make it work. And then they have to look for areas where there are conflicts of interest, where there might be problems, where the likely breakdowns might occur and just try to be vigilant."

Roye, who will probably command top dollar at a leading law firm or investment group, most likely $1 million or more, also thinks the investment management industry is at a key juncture in its 80-year history.

"They've had a lot to digest in terms of regulatory changes, [and] I think that has demanded a lot of time and attention and resources," he said. "We'll just have to let the dust settle, and, hopefully, this isn't just a one-time burst of momentum to get people focused on doing the right thing [but] ends up as enduring."

As far as the SEC, which took heat from some lawmakers for not noticing that seemingly obvious and rampant wrongdoing was occurring under its very nose, Roye said its oversight is stronger for the scandal. He said a new risk assessment office, which is focused on locating areas where there could be potential for profiteering across the asset management industry, as well as a fundamental change in the SEC's approach to oversight, has the regulator anticipating, instead of reacting to, wrongdoing. It's also getting a reported $113 million technology upgrade.

"Unfortunately, the problem is, when you try to get out in front, people say there's not enough blood on the floor," he said, citing the recent backlash created by the SEC's hedge fund advisor registration. Beginning next January, hedge funds, which have been entirely unregulated, must register with SEC. "Folks were basically saying, Well, there hasn't been enough fraud yet.'"

While Donaldson said in a statement that Roye "will leave a strong and lasting legacy," Tittsworth said his impact probably wouldn't be felt anytime too soon.

"He was certainly present during one of the most tumultuous and activist times in the SEC's 70-year history. The investment advisor's role was completely revolutionized. He was involved in all the major cases, including Enron. His effect is going to take a few months and perhaps even years to figure out," Tittsworth said.

Other noteworthy accomplishments under Roye's watch include improving disclosure of fund fees and expenses, conflicts of interest, portfolio holdings, after-tax performance, proxy voting policies and portfolio manager information. Roye also developed an online registration and public disclosure system for investment advisors, modernized mutual fund advertising rules and published a study analyzing historical trends in mutual fund fees.

On a personal note, Roye also reported that he's weathered the media scrutiny and the very public criticism of his job performance rather well.

"One thing you recognize in this job is that, no matter what you do, you're going to make some people happy and some people unhappy. That just goes with the territory," he said matter-of-factly. "The good thing for me has been that we've had a chairman who's willing to do what he thinks is right. It's not Republican, it's not Democrat, it's just what he thinks is the right thing to do for investors. So when you're working for someone like that, the fact that somebody criticizes you, it doesn't matter. You're just sticking to your principles."

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