Timing is everything.
Paul Roye, the director of the division of investment management at the SEC, wants to speed things up. He said the division's top priority right now is to reduce the turnaround time of applications of rule exemptions and no-action interpretive letters.
"That doesn't mean you're going to get a yes' to everything that comes in our door, but hopefully it will mean you will have some clear indication on where we are with the issues, and if it's something that we can go forward on, that we'll go forward in a reasonable timeframe," Roye said.
Roye outlined the division of investment management's agenda last week in Orlando at the 2002 Mutual Funds and Investment Management Conference co-sponsored by the Investment Company Institute and the Federal Bar Association.
Roye's calling for increased efficiency comes at the heels of his boss doing the same. On March 20, SEC Chairman Harvey Pitt announced that the Commission was initiating a four-month internal special study to examine the SEC's operations, efficiency, productivity and resources.
"...we, as public servants, have an obligation to reach decisions and provide answers as quickly and as efficiently as possible so that government does not end up inadvertently impeding a vibrant and growing economy," Pitt said in the announcement.
Actions taken by the division of investment management to create efficiency, particularly with respect to issuing exemptive orders, will be welcomed by the fund industry.
"The exemptive process is really the engine of innovation in our industry. This system isn't operating as it should be," said Thomas Lemke, a partner with Morgan, Lewis & Bockius, a day before Roye outlined his agenda. "How is the industry going to innovate when the exemptive process takes so long?"
One of the best ways to speed things up is to codify into rules those items on which the division grants a lot of exemptive orders, Roye said. The most often requested exemption is the merging of affiliated funds. Rule 17a-8 of the Investment Company Act of 1940 exempts mergers involving funds that are affiliated solely because they have the same investment advisor, but requires that the funds receive exemptive relief to do so.
Toward the end of last year, however, the SEC proposed to amend the rule to permit mergers between affiliated funds to occur without exemptive relief if the fund's board addresses a number of factors. These factors include discussing tax consequences and effects on operating expenses and shareholder fees, ensuring the acquired fund shareholders vote to approve the merger, and ensuring shareholders with more than 5% of the acquired fund vote their shares in the same proportion as other shareholders.
Amending 17a-8 is one of the division's top priorities, Roye said. It would certainly be helpful if, as has been suggested, the mutual fund industry goes on a fund consolidation spree.
"We think that the timing of this is really important given the expectation that there will be a fair amount of consolidation in the industry," said Heidi Stam, a principal at The Vanguard Group of Valley Forge, Pa.
The second most requested application for an exemptive order and another priority for Roye is the fund board selection of a sub-advisor. A proposed "manager of managers" rule would allow funds to select and change the sub-advisors of a fund without shareholder approval.
Other Priorities
There are also a host of other issues that the SEC is working on that are not related to the goal of increasing efficiency. The division of investment management is in the midst of reforming shareholder reports, Roye said. The Commission is currently considering requiring that certain readable analytical information would be added to annual reports, removing the requirement that full lists of portfolio holdings be mailed to shareholders, and even increasing the frequency of the disclosure of holdings.
Last November, the SEC issued a concept release on actively managed exchange-traded funds. The comment period ended in January and now the Commission is reviewing the comments it received. The necessity of portfolio transparency in order to maintain an effective arbitrage mechanism remains the main obstacle to active ETFs, Roye said. Although the SEC is thinking about active products, it is closer to approving applications of ETFs based on fixed-income indices, Roye said (see MFMN Jan. 21, 2002).
Finally, the division of investment management is actively considering amendments to Rule 482 of the Securities Act of 1933, which permits funds to advertise performance under standardized conditions. The rule requires that advertisements that include total return numbers use data that is accurate to the most recent calendar quarter ended before the ad is submitted for publication. The SEC, however, is concerned that those numbers could be misleading if market volatility changes a fund's performance significantly. So, the SEC is considering requiring that the data be accurate to the most recent month.
That could cause some problems for fund companies, particularly if they are advertising in publications that require copy well before the publication date, said Alexander Gavis, associate general counsel at Fidelity Investments of Boston. In a letter to Roye, the ICI pointed out that requiring month-end numbers in Rule 482 materials would cut the shelf-life of the materials that fund distributors give to financial intermediaries to disseminate to one month forcing companies to update them 12 times a year. Also, the ICI says that a one-month provision would make it more likely that standardized performance information for different periods would appear at the same time because of varying lead times at different publications.
The ICI proposes that performance ads include both a narrative disclosure warning investors that volatile markets can change performance and a source investors can use to get up-to-date information, such as a Web site or toll-free telephone number. It is not yet clear which approach the SEC will take, but some type of Rule 482 amendment is imminent.
"This is really one of our priorities," Roye said. "It's something you'll likely see relatively soon."
