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Rating:Maybe Congress Should Ratify the '40 Act All Over Again Not Rated 0.0 Email Routing List Email & Route  Print Print
Wednesday, September 17, 2014

Maybe Congress Should Ratify the '40 Act All Over Again

News summary by MFWire's editors

Here's an idea for members of Congress who are pushing regulators to bolster the oversight of the asset management industry by, among other things, worrying over leverage in mutual funds. The idea comes in three easy steps.

1. Repeal the Investment Company Act of 1940

2. Cut and paste all of the language of the freshly-repealed '40 Act into a new document, replacing every mention of "1940" with "2014."

3. Ratify the new Investment Company Act of 2014, or '14 Act for short, and then really enforce it.

With the nudging of Senators and members of the House of Representatives, the Securities and Exchange Commission is flexing their enforcement muscles in the asset management space. And mutual fund firms are among those in the SEC's sights.

The Wall Street Journal, which broke the story, says that the regulatory agency is considering rules that would require much more data disclosure regarding to asset managers' portfolio holdings as well as stress tests of those portfolios. There would also be greater restrictions on the use of derivatives and the launching of alternative products. And asset managers might also be required to develop insolvency plans to address what happens should they go bust.

The WSJ headline, "SEC Preps Mutual Fund Rules," singles out the mutual fund industry, though the article itself describes the SEC's efforts as aiming at "the $50 trillion asset-management industry," not just the mutual fund business.

Not surprisingly, the SEC's efforts caught the attention of a number of other publications, including InvestmentNews; Barron's; Reuters; ThinkAdvisor and Zacks.

In his article for the Journal, Ackerman writes that SEC staff are working with the agency's five commissioners to develop these proposals, but also notes that like all proposed regulations, these changes could take months or years to see reality, if they ever do.

However, if the proposals do become a reality, asset managers would face a beefed-up oversight structure similar to that of the banking industry.

Last week ICI chief Paul Schott Stevens issued a statement welcoming "greater involvement by the Securities and Exchange Commission, as the primary regulator for funds and asset managers, in questions of financial stability."

Yet the '40 Act, if enforced effectively, would already address many of the regulators' contemporary concerns, at least when it comes to the mutual slice of the asset management industry. For example, mutual funds can't go crazy with derivatives because they are prohibited by law from doing anything that could lead to a negative NAV, where the liquidating the fund would actually involve the shareholders paying money instead of taking it out.

Meanwhile, the SEC is flexing its asset management muscles in other ways. It leveled fraud charges against a Houston-based RIA for allegedly failing to disclose revenue-sharing arrangements tied to a particular line of fund products, and also plans a broader sweep of the practice.

For fundsters who have feedback on the SEC's regulatory plans, on this front or others, chair Mary Jo White said at the ICI GMM in May that she wants to hear more from mutual fund executives. 

Correction: A prior version of this story mistakenly referenced remarks that ICI chief Paul Schott Stevens made at the ICI GMM in May. Those remarks were specifically related to the trade group's opposition to the FSOC's proposal to designate asset managers as SIFIs.

Separately, last week Stevens issued a statement in support of the SEC's "greater involvement ... in questions of financial stability."

Edited by: Tommy Fernandez

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