Securities and Exchange Commission Chairman Christopher Cox indicated last week that the regulator would seek additional public comment on its independent chairman rule, a likely sign that he intends to forge ahead with one of his predecessor's most controversial measures.
Speaking to reporters after a Senate Banking Committee testimony that ran the regulatory gamut, Cox said, "That's the direction we're going. In the next few days, we should be able to say something publicly."
Although there was no official statement from SEC prior to deadline, a fresh comment period for the independent chairman rule would signal yet another turn in what has been a roundabout bit of rulemaking.
First approved in 2004, the rule requires that the chairman of a fund's board of directors be entirely independent of the fund complex. It also says that at least 75% of a fund's board of directors must be independent. It was crafted because many of the scandal's illegal market-timing deals were approved by fund directors or carried out with their knowledge. But fund companies, including bigwigs like Fidelity Investments, claim it's too costly and would remove the industry's sharpest minds from key decision making.
So, last year, the U.S. Chamber of Commerce filed a lawsuit on the industry's behalf. The U.S. Court of Appeals concluded that the SEC was within in its authority to pass such a rule, but sent it back to the Commission for further cost analysis. Then just eight days after the Court's remand, the rule's champion and former SEC Chairman William Donaldson rushed a new vote before his departure. It passed by a 3-2 margin.
The Chamber filed suit again, arguing this time that the Commission did not perform sufficient cost analysis. The Chamber also won a stay of the rule, which was supposed to go into effect on Jan. 1.
Earlier this month, the Court decided that the Commission was sloppy in its analysis of the rule's impact during the remand and added that it would be within reason to vacate the rule entirely. Instead, the Court gave the Commission 90 days to solicit public comment on previously proprietary information that was used as a basis for some of the regulator's cost analysis.
Putting the information out for public comment would seem to affirm that Cox intends to go forward with rulemaking that was carried out under Donaldson, an objective he has gestured to in the past and one that has drawn intense speculation from the industry.
Whatever the case, officials with the Chamber said this satisfies one of their major contentions.
"This is what we were seeking," said Amar Sarwall, general litigation counsel at the Chamber. "Our goal was to obtain public notice and comment.
"We're definitely appreciative, but we'd also like to see the details. This was also pretty quick decision making on the part of the SEC, so we're very appreciative of that, too," Sarwall added.
In his remarks to the Senate committee, Cox also affirmed his goal to make mutual fund prospectuses more user-friendly.
As a member of Congress for 17 years, the California Republican said he learned that "the common sense of ordinary Americans is the essence and the strength" of a democracy. Most constituents are not investment bankers, or lawyers, or accountants, he continued, "but most of them are investors." When those investors can make sound decisions based on information that is understandable, accessible and accurate, competition in every corner of the financial marketplace is healthier.
But the disclosure that the industry provides to investors, Cox said, is so full of legal jargon and boilerplate disclosure that it obscures important information. That's why, he offered, the Commission decided three months ago to overhaul executive compensation disclosure. Now companies must provide one total compensation number, as well as clearly outline retirement benefits and termination payments. The compensation of board members must also be disclosed and a narrative detailing of how a board arrived at executive compensation packages must be filed with the regulator.
While some elements of the executive compensation disclosure rule are new and other existed previously, they all share, for the first time, rhetoric that leverages plain English, Cox said.
"I hope to advance this cause still further," he added, "so that, ultimately, every communication aimed at retail investors is so free of jargon and legalese that it could pass muster with the editors of the Money' section of USA Today."
The chairman also reiterated his desire to improve disclosure through interactive data, which would allow investors "to quickly search for any information they want without slogging through an 80-page document." Also known as XBRL or "data-tagging," it would additionally slash the number of filings an SEC-registered company would have to make with the regulator. Today, Cox noted, domestic issuers must file no fewer than 17 individual forms annually, an exercise that excludes proxy materials, annual reports, securities ownership, tender offers and mergers and acquisitions.
"The point is to allow investors to more easily access, search, analyze and compare data," Cox remarked.
Those comments drew plaudits from the lawmakers during the question and answer segment of the testimony, a discourse that was broadcast live over the committee's website and seemed, as Senate hearings go, uncharacteristically collegial. But ironically, investor advocates say it might be Cox's record in the halls of Congress that could finally provide prospectus overhaul with the headwind it's lacked under previous Commission chairmen.
"To some extent it's like Nixon opening relations with China," said Roy Weitz, publisher of the investor advocacy website Fundalarm.com. "Because of his record as a laissez-faire conservative, he might have a chance to get something done on the disclosure side."
Weitz agrees that a simplified prospectus would be a powerful tool for investors - a straightforward depiction of fund costs and performance would be a great start, he said - but he doesn't expect it to occur without resistance. First, Weitz said, funds don't want to risk a lawsuit if too much legalese is pared from the prospectus.
Then also, "if you could wave a magic wand and create the perfect disclosure document, a huge number of really bad funds would be in trouble," he said. "There are billions of dollars at stake here."
And if Cox's electronic filing scheme does translate into a cost savings for funds, Weitz would like to see the SEC heighten scrutiny of expense ratios.
"The SEC can't set a fund's expense ratio, but they can hold their feet to the fire," he said.
Cox also reported that 2,104 hedge fund managers have complied with the regulator's recent registration deadline. That number covers more than 11,000 hedge funds, he said, and more than $2 trillion in assets. Cox estimated that about half of the nation's hedge fund managers were previously registered with SEC, either voluntarily or because they offered a regulated product, such as a mutual fund.
"I think we now have our arms around exactly what the hedge fund population is," said Cox, who reported that no new developments have occurred in one hedge fund manager's lawsuit against the rule. He thinks some managers may have resisted registration in anticipation of the lawsuit's outcome, but that it's probably "a very small number."
Finally, Cox said he doesn't expect to fully exempt small companies, which would include many mutual funds, from Section 404 of the Sarbanes-Oxley Act. A measure that addresses more robust accounting controls, Section 404 is proving too costly, many small businesses claim. But Cox said exempting smaller players would remove 80% of the nation's companies from compliance with the rule.
"Our goal is to find a way to make it work," he told the committee.
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