A14 Economy & Business
A stronger SEC under financial reform law Agency that some
by Zachary A. Goldfarb
The financial regulation law signed by President Obama on Wednesday will arguably affect no federal agency more than it does the Securities and Exchange Commission. The SEC is required to issue 95
new regulations governing a wide swath of the financial sector, doz- ens more than the Federal Re- serve, the new Consumer Finan- cial Protection Bureau or other federal agencies. The SEC is also slated to complete 17 one-time studies and five new ongoing re- ports, according to a tally by the law firm Davis Polk & Wardwell. The SEC will serve on the new Financial Stability Oversight Council, a new interagency body meant to spot emerging risks to the overall financial system. It will have to write rules to super- vise the multibillion-dollar mar- ket of derivatives linked to stocks and bonds. It will begin examin- ing the activities of hedge funds and private equity firms and tighten oversight of credit-rating agencies. And it will do studies of short selling and whether bro- kerage and investment firms must meet higher standards. Perhaps only the Office of
Thrift Supervision can compete with the SEC in terms of the new law’s impact. But in contrast to the SEC, which is gaining so many new responsibilities, OTS, which regulated home lenders, is being abolished. Indeed, the SEC is coming out of the financial regulatory over- haul far stronger than many ob- servers of the agency might have anticipated. The SEC was the ob- ject of much criticism — on Capi- tol Hill, Wall Street and elsewhere — for multiple regulatory fail- ures, from oversight of invest-
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THURSDAY, JULY 22, 2010
SEC proposes to tighten rules on
thought might face cuts gets new duties, powers
by Zachary A. Goldfarb Are mutual funds overcharging
EVAN VUCCI/ASSOCIATED PRESS Securities and Exchange Commission Chairman Mary Schapiro testifies Tuesday on Capitol Hill.
ment banks to the Ponzi scheme orchestrated by Bernard Madoff. “There was a point in time when things were not looking good for the SEC. People were asking whether it should be merged with another agency,” said Marc S. Gerber, a securities lawyer at Skadden Arps. “But with the leadership led by Mary Schapiro, they were able to right the ship and get the SEC on course and improve their stand- ing in Congress, so they were able to get these new responsibilities.”
More tasks for agency
Before the financial reform law, the SEC already had a full plate. It is working to implement or final- ize nearly 20 new regulations cov- ering areas ranging from money market funds to high-speed elec- tronic trading. It is also conduct- ing numerous investigations growing out of the financial crisis and is in the early stages of imple- menting many internal reforms in its enforcement and exam- ination divisions. The agency’s new tasks are just as onerous. Schapiro said at a congressional hearing Tuesday that the SEC will have to hire 800 new employees. “The act requires the SEC to promulgate a large number of new rules, create five new offices, and conduct multiple studies, many within one year,” Schapiro told Congress in prepared testi- mony. “The importance and com-
plexity of the rules coupled both with their timing and high vol- ume and the rule writing agenda currently pending will make the upcoming rule writing process both logistically challenging and extremely labor intensive.” SEC officials say they will look to write rules and conduct studies as fast as they can with the sched- ule largely dictated by the new law.
Some of the new rules the SEC will implement on its own. Others will require coordination with other agencies. For example, the SEC must work with the Com- modity Futures Trading Commis- sion to write rules for derivatives. The agency must work with the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to write rules requiring that banks that issue securities to the secondary market hold 5 percent of the investment on their own balance sheets — a “risk reten- tion” measure. While the new law imposes
many new responsibilities on the SEC, it also makes the agency’s job easier in several ways. One is offering more explicit support for some of the more controversial rulemaking efforts the SEC had already launched. For example, the SEC has pro- posed rules that would make it easier for shareholders to join to- gether to nominate directors to sit on the boards of public compa-
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nies. But business interests gen- erally oppose “proxy access” and have threatened to sue if the SEC implements the rules. The legislation, which makes clear that the agency has the pow- er to write rules granting this power to shareholders, makes the threat of lawsuit less ominous. “For a number of years people have questioned whether the SEC has the authority to adopt proxy access,” Gerber said. “That ques- tion has been answered.”
New enforcement powers
The law also gives the agency’s enforcement division new powers to conduct investigations and bring lawsuits against companies and people accused of commit- ting financial wrongdoing. It will be easier for the SEC to serve law- suits and subpoenas and to bring cases in a more favorable and less expensive regulatory court. The agency will also have a new abili- ty to reward whistleblowers who provide information that’s essen- tial to a case. The law gives the agency plenty
of new financial support — but not as much as the agency want- ed. It doubles the agency’s budget over five years and also creates a reserve fund the agency can use to plan long-term expenditures such as technology. But the agen- cy wasn’t given the power to fund itself through industry fees, as it had wanted.
goldfarbz@washpost.com
investors? Securities and Exchange Com- mission Chairman Mary Schapi- ro, in gentler terms, asked as much Wednesday as the agency proposed new rules to govern mu- tual fund fees. The mutual fund fees at issue, known as 12b-1 fees, are little- known annual charges that SEC officials worry are making some investors pay more than they re- alize to invest in mutual funds. As originally set up, 12b-1 fees go to pay for marketing mutual funds to new investors and to compen- sating brokerages that sell shares in the funds. Investors often can choose to
pay an upfront charge, typically 2 to 5 percent of the amount in- vested, when they commit money to a mutual fund. Then they pay a small annual 12b-1 fee, up to 0.25 percent, for the entire time they own shares in the fund. Or in- vestors can choose to pay no up- front charges and then pay a larg- er annual 12b-1 fee, up to 1 per- cent, for the time they own shares in the fund. Investors can’t shop around for the best deals on mu- tual funds because brokerages cannot compete with one another on fees. The SEC is looking at turning this system on its head out of con- cern that investors don’t know that they’re paying the 12b-1 fees — sometimes years after they in- vested in the fund. “Despite pay- ing billions of dollars, many in- vestors do not understand what 12b-1 fees are, and it’s likely that some don’t even know that these fees are being deducted from their funds or who they are ulti- mately compensating,” Schapiro said on Wednesday. Under the new mutual fund fee
mutual fund fees New caps would be placed on little-known 12b-1 charges
system envisioned by the SEC, in- vestors could still choose to pay an upfront or an annual fee. But investors wouldn’t expect to pay out as much money over time be- cause of new caps on the annual fee. Investors wouldn’t pay out more over time in annual fees than they would have, had they paid the upfront fee. Unlike now, these sales charges would be listed as such in mutual fund disclosures. The term “12b-1 fee” would disappear. In addition, all mutual funds could charge up to 0.25 percent of assets in an annual marketing fee. This fee could be charged forever. Finally, brokerages would be able to strike deals with mutual funds to sell shares with dis- counted fees. The SEC hopes the competition would drive down mutual fund fees. The proposal would not affect “no-load” funds, which typically do not charge such fees. The mutual fund industry, which has defended 12b-1 fees as an important source of revenue for funds, held back judgment on the proposal. The fees “have proven over time to be a highly efficient and tax-effective method for covering the costs of a range of services that are valuable and important for mutual fund investors,” said Paul Stevens, head of the In- vestment Company Institute. “We look forward to reviewing and commenting on the SEC’s pro- posed reforms to the 12b-1 rule, which will impact literally mil- lions of investors, thousands of funds and myriad financial in- termediaries.” Also Wednesday, the SEC voted to amend the disclosures invest- ment advisers provide clients. The SEC wants to require ad- visers to give clients brochures containing plain English narra- tives describing advisers’ busi- nesses, services and conflicts of interest. The SEC also wants these brochures to put on the agency’s Web site and be available to the public.
goldfarbz@washpost.com
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