Schapiro Outlines Priorities in Rulemaking

Chair Mary Schapiro told mutual fund directors that the SEC will soon consider rulemaking initiatives aimed at proxy access for director nominations, money market funds and target date funds. The SEC is also examining its short sale rules at a roundtable today. In remarks at the mutual fund director's annual policy conference, Schapiro added that the SEC will reconsider the need for Rule 12b-1, although it is currently lower on the list of priorities. Her speech is posted on the SEC's Web site.

Schapiro surveyed the damages from the 2008 market crisis. She cited a recent report which found that $10 trillion was lost in U.S. stock markets alone. The Dow Jones Industrial Average and the S&P 500 Index both fell more than 30% in 2008 which was their worst performance since the 1930s. Nasdaq fell more than 40%. Assets of stock mutual funds declined by $2.8 trillion or 43%. It is no wonder that investor confidence is deeply shaken, she said.

The SEC's roundtable on short sales will focus on the impact of restrictions on price tests and the circuit breaker approach. Schapiro said the uptick rule must be reconsidered even though it was eliminated based on an in-depth study and careful consideration. She said a careful reexamination will be conducted to see if the decision to eliminate the rule is harming those it was intended to protect. The SEC will not tolerate distorted pricing, manipulated markets or unnecessary market inefficiencies, according to Schapiro, whether caused by short sellers or long-only investors.

Schapiro reported that the SEC will soon consider a proposal to ensure that shareholders have a meaningful opportunity to nominate directors to corporate boards. The proxy access initiative is intended to empower investors, she explained, and to provide them with a greater voice in the nomination of directors. Proxy access will enhance the legitimacy of the director nomination process, in her view, and will promote accountability among managers and directors.

Money market fund assets have increased over the last year, but the composition of the assets has changed. The SEC will conduct a comprehensive examination of money market funds' regulatory regime, according to Schapiro. The staff is examining credit quality, maturity and liquidity provisions in considering ways to strengthen money market fund requirements. The staff will also consider whether fundamental changes are needed, such as whether floating rate net asset values would better protect investors.

Schapiro said the Investment Company Institute's money market fund task force presented an important report on potential new regulations. The SEC's examination of the issues and its eventual reforms are likely to extend beyond those advocated by ICI's report, she advised.

Schapiro said the staff will also examine target date funds. These funds have become increasingly popular but have produced some troubling investment results. One explanation for the losses experienced by 2010 target date funds was that investors were presumed to continue to maintain their investments into retirement and partially live off the proceeds for a number of years after retirement. If that is the case, Schapiro said it must be clearly disclosed to investors.

The SEC is reviewing target date funds' disclosure about their shifts in allocation and investments. The staff is also examining whether the same target date funds underlie both retirement and college savings plans. The staff is working closely with the Department of Labor, Schapiro said. She added that the Senate Special Committee on Aging has also taken an interest in this area. The SEC will consider whether the use of a particular target date in a fund's name may be misleading or confusing and whether additional controls should dictate the use of a target date in a fund's name.

Schapiro said she is committed to an open-minded review of Rule 12b-1. The timing of the review will be dictated somewhat by other reform initiatives, she said, but Rule 12b-1 will receive SEC attention.

Schapiro emphasized fund directors' role in the annual consideration of the investment advisory contracts. Directors' role in the contract review process will be subject to considerable scrutiny since the Supreme Court has agreed to consider the issue in Jones v. Harris. Given the importance of the level of advisory fees, Schapiro said the SEC will likely express its views in the amicus process.