The US mutual fund industry’s lobbyist, the Investment Company Institute, is tracking more than 100 rule-makings, studies and reports mandated by the Dodd-Frank Act, the sweeping financial reform law passed last July.
But the issue of “broadest and deepest concern” to the industry, says Paul Schott Stevens, ICI president and chief executive, is the Financial Stability Oversight Council’s plan to designate non-bank financial institutions as systemically important, and thus subject to heightened oversight by the Federal Reserve.
Since money market funds are often cited as the focus of FSOC concern in the registered fund area, the industry is worried that managers of the funds – and/or the funds themselves – could be designated as systemic risks.
The ICI is “disappointed” that FSOC has not been more explicit about how it intends to carry out its designation duties, says Mr Stevens.
The council will meet again in May and may begin sending information requests to companies being considered for designation. It may look at assets under management, business models, whether the firm owns an insurance company, board members and other areas.
Another top concern, says Mr Stevens, is whether regulators will move forward with subjecting mutual funds that invest in commodity futures and options to oversight by the Commodity Futures Trading Commission. The ICI argued in its comment letter to the regulator that funds are already subject to comprehensive oversight in this area.
The Securities and Exchange Commission’s proposed whistleblower rules are also a big source of anxiety in the industry. As proposed, the rules would allow would-be whistleblowers to bypass internal compliance programmes and go straight to the SEC. Firms believe this scenario is especially likely since Dodd-Frank provides that whistleblowers with original information leading to a successful enforcement action with sanctions of at least $1m can get 10 to 30 per cent of those penalties.
“I think the concern is accentuated by what seems to be an especially aggressive enforcement mentality on the part of the SEC,” says Roger Joseph, partner at Bingham McCutchen.
Also high on the list of industry worries is the possibility that a uniform fiduciary standard will be imposed on broker-dealers. It is unclear exactly how such a standard would change the structure and incentives that broker-dealers currently have in terms of selling funds. The SEC has said it will not move forward with any proposals on this issue until after the one-year anniversary of Dodd-Frank’s passage.
Industry efforts to influence the outcome of regulation in these and other areas lifted securities and investment lobbying expenditures from $94.5m in 2009 to $103.3m last year. The ICI’s lobbying costs decreased slightly from $5.5m in 2009 to $4.8m last year.
Meanwhile, Fidelity’s lobbying costs went from $2.9m to $3.5m during the same period; BlackRock more than doubled its lobbying spend from $545,000 to $1.45m, as did Federated, going from $313,000 to $718,000. Vanguard remained at $1.2m in lobbying expenditures, according to OpenSecrets.org.
Beyond paying for lobbyists, the industry is also stepping up its internal and external resources to assess the onslaught of rulemaking and to prepare for it, to the extent possible.
“Just keeping tabs on the changing competitive landscape is essential,” says Dan Crowley, partner at K&L Gates. Firms have to adapt to the new regulatory environment, because doing so is a necessary facet of their strategic business plans going forward, he says.
In addition to gaining a better understanding of how the regulatory environment may change, firms are also seeking to enhance their understanding of enterprise risk, says David Thelander, managing director of Promontory Financial Group. Having a strong understanding of their own businesses helps firms grasp how regulation could affect them, and in turn allows them to respond to rule proposals via comment letters.
As deadlines on final rulemaking and studies approach, the industry is keeping close tabs on the ongoing debate over the SEC’s budget. The SEC gained about $74m in funding for the remainder of fiscal 2011. But whether Congress will approve an increased, decreased or flat budget for 2012 is unclear.
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