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Investment Management Director Outlines Priorities, Concerns

In the keynote address at a recent mutual funds and investment management conference, Andrew Donohue, the director of the SEC's Division of Investment Management, outlined his vision for modernizing fund regulations and shared the developments about which he worries the most. As he has previously stated, Mr. Donohue plans to review fund director responsibilities, the books and records rules and Rule 12b-1 fees. He added that many overseas regulatory regimes provide a more modern approach to regulation than the United States, since they developed later and had the benefit of evaluating the U.S. regulatory system. He encouraged the fund industry to look overseas for investor-oriented practices that could be brought to the U.S. fund industry.

Mr. Donohue said the staff review of the recordkeeping requirements will focus on technology-based alternatives. This initiative will not be rushed, he advised. He expects the staff to continue the study and review process throughout most of the year.

As the fund industry continues to evolve, the director cautioned funds to continue to abide by the fundamental fiduciary, compliance-oriented culture on which it was built. He said it is intolerable for fund investors to be harmed by breaches of basic regulatory requirements.

Mr. Donohue reported that the review of Rule 12b-1 is a high priority for this year. The staff will look at the rule itself and also the factors that fund boards consider when approving or renewing a Rule 12b-1 plan.

Mr. Donohue said he is worried about the proliferation of certain yield-based investment products as baby boomers reach the distribution phase of their investment cycles. He urged the industry to be responsible as it develops products aimed at investors in the distribution phase. Funds and those who sell fund shares must be clear about how the yield is generated and the risks associated with the fund and its yield-generation techniques, according to the director.

Director Donohue added that he is also concerned about the increasing use of derivatives and other sophisticated financial instruments. Fund legal, compliance and accounting groups must understand these instruments before the funds invest, he emphasized.

Mr. Donohue said the list of issues that worry him might change by next month, but his point is that those issues should not be ignored. Trust your instincts, investigate further and manage the issues that are the most worrisome or perplexing, he said. By doing so, funds will earn the trust and confidence that investors place in them.