Amid the shadow of the Securities and Exchange Commission's crucial drive toward assuring ethical mutual fund transactions, the National Securities Clearing Corporation, the commission's self-regulating organization that processes most fund transactions, wants to compartmentalize and standardize the data of another industry - separately managed accounts.
And for many already in the SMA industry, the rule change proposal could pose both a problem and a threat.
Currently, SMA information is handled by several private firms, which maintain information in their respective databases. But on Dec. 3 the NSCC proposed Rule 59, which would give the non-profit company the power to create an all-inclusive SMA platform that all brokers would have access to. It is the second time since January that the NSCC has filed to enter the SMA fray.
Vendors already offering SMA's want to know how the proposal, if accepted, will be paid for. CheckFree Investment Services, the No. 1 vendor of SMA services, plans to file a letter objecting to Rule 59, and will emphasize the lack of explanation as to how the new initiative would be funded. In fact, the NSCC itself admitted it would not explain the economics of its plan until a later filing.
Jamie Waller, the vice president of strategy development for CIS who helped found the company when it was known as APL, said that the economic rationale behind the NSCC's proposal is either non-existent or has yet to be explained. Without explaining the finances, it seems the only logical place money could come from would be mutual funds.
"You can't tell the market you're launching a product and not give any guidance on how you're going to pay for it," Waller said. After pointing out that some estimates place the total cost of the initiative at $50 million, Waller asked "Why should one penny of our money be used to subsidize the new initiative?"
There are other potential objections to the rule proposal. The NSCC could be stepping beyond its role as a regulatory agency and into the middle of a vehicle it has little experience in, SMA's. Companies already providing SMA information, if the NSCC gets its wish and the rule is approved, could lose business. In its proposal, the NSCC addressed this obvious problem.
"NSCC does not believe that the proposed rule change will impose a burden on competition not necessary or appropriate in furtherance of the purposes of the act," its filing said. It went on to say that current vendors would not be replaced and that it believed its involvement would facilitate more competition, not less.
In the filing, it mentioned a January protest from CheckFree, not identified by name but rather as "a company that is the largest service vendor to the managed account industry," that the NSCC's arrival would "impose a burden of competition." But other companies at the time, and the Money Management Institute, argued a standard SMA platform would foster more competition.
While Waller admitted he has not spoken to CIS's competitors about what an NSCC platform would do to competition, he did mention an SMA data outsourcer who felt "concern that this would actually stifle competition for some period of time."
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