Mutual fund companies face the prospect of a new SEC examination next year that has little to do with the agency's traditional scrutiny of securities practices and procedures.
SEC examiners will check fund companies' books to insure that they are complying with new consumer privacy rules that Congress has ordered the agency to adopt. The new rules, which the SEC proposed March 2, require fund companies and financial services firms to adopt a privacy policy and provide a written notice of that policy to investors at least annually.
If the SEC adopts the privacy rules later this year, SEC examiners will be checking fund company records to insure that fund companies are providing shareholders with the notices the new rules require, said Lori Richards, director of the SEC's office of compliance, inspections and examinations.
The privacy rules will not go into effect before Nov. 13. The SEC in its rule proposal asked for comment about whether the Nov. 13 deadline would provide companies sufficient time to comply with the new rules. The public has until March 31 to submit comments on the privacy rules proposal.
The new rules will be expensive. The SEC estimated that it will cost fund companies more than $21 million simply to draft the privacy policies that the new law requires. That cost is less than it might have been because some companies already have privacy policies, the SEC said.
Mailing expenses were more difficult to quantify, the SEC said. But, it estimated that fund companies would spend about $1.5 million annually in mailing costs of notices required under the new rules. The proposal permits companies to send notices electronically to those consumers who agree to receive the notice by that method.
The SEC proposed the rule as a result of the Gramm-Leach-Bliley Act that Congress passed in November. The new law requires financial institutions to take steps to protect the privacy of consumers' personal financial information. Congress ordered federal agencies to adopt new rules to implement the law.
Under the law, financial institutions are prohibited from sharing non-public personal information about a consumer with third parties unless the financial institution provides the consumer with written notice of the company's policies. That notice must include the opportunity for consumers to opt out of having their personal information provided to others.
It appears that the opt-out notice will not usually be necessary for fund companies, according to the SEC. Industry representatives told the SEC staff that few if any fund companies share information with unaffiliated third parties. Ethical standards also require investment advisers to maintain client confidentiality, a fact that should further reduce the necessity of the opt-out provision, the SEC said.
