THE INABILITY TO INNOVATE AND THE DIRECT impact of that on their firm's profitability are fund executives' biggest regulatory concerns.
This is one of the key findings from Money Management Executive's 2011 Regulatory Outlook Survey of 184 industry executives by Lodestar Research Corp.
Overall, 64% of the executives surveyed are concerned or very concerned that the Dodd-Frank Wall Street Reform Act and other new regulations that have emerged in response to the financial crisis will hurt product innovation and competitiveness of the U.S. financial markets. Another 25% are somewhat concerned. Only 7% are not very concerned, and 2% not at all concerned.
In terms of the impact on their own firms, 39% are concerned or very concerned that the new regulations will impede their company's ability to innovate. Forty-four percent are concerned or very concerned that new regulations will stifle their organization's growth.
The greatest concern, for nearly half, 47%, is the impact of new regulations on their firm's bottom line performance.
Top 5 Concerns
Given a list of 15 new or pending regulations and asked to point to their top five concerns, the No. 1 concern, for 62% of respondents, is regulation of "systemically important" funds or fund companies.
The No. 2 concern, for 50%, is the effect of new fiduciary rules on advisers and brokers.
The No. 3 problem perceived, for 45%, is elimination or restructuring of 12b-1 fees.
Coming in at No. 4, for 42%, is elimination of the $1 net asset value for money market funds.
The No. 5 concern, for 41% of industry executives, is the Securities and Exchange Commission's review of the use of derivatives in funds and exchange-traded funds.
Other compliance and regulatory areas that are on fund executives' minds include:
* Money market fund reform regulations, including long-term solvency plans proposed by the Investment Company Institute, Fidelity, Black- Rock and others (35%).
* IRS changes in accounting for the cost-basis of stock and fund transactions (32%).
* Registration of hedge funds with the SEC or state regulators (24%).
* The Department of Labor's plan to require disclosure of 401(k) expenses and management fees, effective April 30, 2012 (21%).
* Plans for "limit up, limit down" for a stock's price in a given day (20%).
* SEC registration of large traders, i.e. firms conducting trades worth $200 million or more in a month (17%).
* SEC and Commodities Futures Trading Commission plans for exchanges that centrally clear swaps and other derivatives (17%).
* Potential restrictions on high-frequency trading, including potential charges for sending "excessive" orders into the marketplace (17%).
* Effectiveness of single-stock circuit breakers implemented by the SEC and exchanges (11%).
SEC Surprise Exams
In an open-ended question on how they plan to prepare for SEC surprise exams, the responses included:
* "Always ensure that we have a compliance- oriented culture."
* "As in the old days of unannounced
* "Engaging auditors to perform audits of different internal departments."
* "Involve all appropriate departments in coordinated fashion."
* "Keep good records."
Asked to what extent their firm's use of social media to promote business interests are restricted by uncertainty over SEC and FINRA regulation, 38% said it is restricted or highly restricted. Another 29% said it is somewhat restricted.
Only 12% reported that it is not very restricted, and 11% said social media at their company is not at all restricted. The remaining 10% said they did not know what their firm's social media policy is.
Budgets & Oversight
As a result of all of these new regulations, 67% of those responding to the ursurvey have a dedicated Chief Compliance Officer at their firm. Forty-three percent have a General Counsel, and 42% have a Chief Risk Officer. At 20% of respondents' firms, none of these positions exist.
Clearly, however, the regulations are having a significant impact on budgets.
In percentage terms, 44% report that their company expects to increase its 2012 compliance and regulation budget by more than 10%.
Twenty-eight percent are planning on increases of 6%-10%, and 22% foresee those increases coming in between 2% to 5%, and 3% of respondents expect negligible increases of less than 2%.
Just 1% of respondents expect a decrease in their firm's compliance and regulation budget-but by less than 2%. (The remaining 2% said they did not know their company's plans.)
As far as their 2011 compliance and regulation budget is concerned, 31% said it is less than $1 million. At 14% of respondents' firms, it is between $1 million and $10 million, and at 13%, it is between $10 million and $50 million.
Only 3% of respondents' firms have budgets over $50 million. A large percentage of respondents, 43%, did not know their firm's budget.
In terms of hiring additional staff over the next 12 to 18 months to support and carry out regulatory functions, the area that respondents expect to hire the most, among 24% of survey participants, is compliance staff.
This is followed by executives in risk management (20%), legal staff (18%), marketing (17%), regulatory reporting (16%), financial reporting (10%), general management (9%) and corporate actions processing (6%).
Among the 184 respondents, the majority, 16%, hold the title of director, followed by senior vice president (12%), manager (12%), managing director (11%), chief executive officer (9%), chief compliance officer (7%) and chief operations officer (5).
Chairmen, associate counsel, chief information officers, and chief quality officers also answered the survey.
The majority of respondents, 36%, work at mutual fund companies, followed by separately managed account firms (18%), with the remaining split between law firms, exchange-traded funds and other types of asset managers, pension plans, annuity providers, brokerage firms, bank trust companies, custodians, consultants, financial planning companies, community banks and consultancies.
Asked which area they work in, 52% said general management; 22%, marketing; 19%, compliance; 13%, fund management; 9%, legal; 7% financial reporting; 3%, data management; 3%, risk management; and 1%, corporate actions.
The 45% remaining listed a myriad of functions, including: business development, IT, shareholder servicing, portfolio management and investor services.