The five SEC commissioners gave unanimous approval to four proposals that would increase the amount of disclosure required by fund firms in a meeting Thursday. The proposals are intended to provide insight about potential conflicts of interest to investors. Yet, the meeting had the least debate of any of the six held since the fund scandals emerged last September. It also provided signs that the Commissioners may be becoming more concerned with overburdening the industry.
SEC Chairman William Donaldson explained that the disclosures are intended to help investors in "gauging whether financial managers' interests are in harmony with their own" and to disclose "potential or real conflicts of interests" and the "policies and procedures used to keep conflicts in check."
The four proposals would require fund firms to identify all staff who play a role in managing fund portfolios; disclose all other portfolios that the fund manager also oversees; disclose the formula used to determine manager compensation; and detail the holdings the portfolio managers and their families have in the funds they manage.
While the commissioners voiced little opposition to the actual proposals during the open hearing, more than one commissioner wondered or asked about the burden the entirety of the requirements are placing on the fund industry. The commissioners also wondered about the unintended consequences of the increased disclosures.
Chairman Donaldson said that it will be the task of the commission to "evaluate usefulness and potential intrusiveness" of the proposals. He also wondered whether the disclosures are properly focused. He pointed out that shareholders must see if there is a potential conflict, but they may also see disclosures that help them see how that potential conflict is being managed.
He called on the fund industry to provide comments to help the SEC evaluate those potentialities. "I want feedback from people in this business," he said.
Commissioner Cynthia Glassman also wondered if the SEC is coming close to creating too much new disclosure.
"Disclosures are getting to the point of information overload, if we are not already there," she said. She then suggested that the SEC prioritize the information provided on fund filings and ask investors for their input on which information is most useful.
Yet, these concerns did not prevent the commissioners from voting 5 to 0 to approve the proposed regulations for a comment period.
Much of the debate centered on the provisions requiring portfolio managers to disclose their compensation and stakes in the funds they manage.
"I do not think it is really anyone's business about how much a portfolio manager has in the funds," said a male commissioner at one point. He added that he has "real qualms" about the disclosure requirement.
Roel Campos responded by pointing out that portfolio managers take their jobs voluntarily and thus freely admit to the required disclosures. "These people have volunteered to be there," he said. "No one has told them that they must do this job."
Earlier, Glassman explained that she had initially wanted a requirement that fund managers reveal the percentage of their net worth that they invest in the funds. That disclosure "may be more a meaningful measure of amount of skin in the game," she explained. Yet she added that the SEC staff convinced her that there are pitfalls with that method.
The staff proposal would require portfolio managers and their families to disclose their holdings in a fund by checking one of a number of dollar-ranged options. The choices would be: none; $1,000-10,000; $10,001-50,000; $50,001-100,000; $100,001-500,000; $500,001-1 million and more than $1 million.
Sanjay Lamba, a SEC staff person, explained to the commissioners that the range format is meant to protect the "legitimate privacy interest" of portfolio managers.
Later in the meeting, Donaldson wondered if the disclosures in that form would possibly mislead investors. He described the potential for a small stake held by manager with a small net worth to be mistaken for a lack of faith in the fund. Conversely, investors could also misconstrue the meaning of a large stake held by a manager with a very large net worth.
"I want comments on potential unintended consequences of this requirement," he said. "Should there be a different disclosure between an investment that may be required versus ones that are voluntary?"
He also wondered what investors would learn from a portfolio manager who sells a stake in the fund. That sale could be potentially misconstrued as investors would not know for certain what motivated the sale.
Donaldson also noted the potential complexity of the requirement that funds disclose all the names, background and experience of employees who have input into the portfolio management process.
"I shudder at potential logistical nightmare of trying to determine who is a part of that team ... [and] the changes that go on in the team," he noted. "The devil is in the details here."
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