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Investment Management Director Reviews Accomplishments

Although the past year will be marked by the credit crisis and the bear market, Andrew Donohue, the director of the SEC's Division of Investment Management, said he hopes it will also be remembered for a revolutionary change in mutual fund disclosure. The SEC adopted a summary prospectus to provide mutual fund investors with key information in a user-friendly format after a lengthy collaboration with the fund industry and investors. Donohue said he is certain of the summary prospectuses' success because of the close collaboration. He spoke at the ICI's securities law developments conference in Washington, D.C. His remarks are posted on the SEC's Web site. In 2009, Donohue expects the SEC to review the money market fund model and its regulatory regime. Both should be tailored to meet the liquidity and capital preservation needs of fund investors, he said. Liquidity previously was not a key focus of money market fund regulations, but it has posed one of the greatest challenges for funds since the credit crisis began in August 2007.

The Division spent a significant portion of its time in the past year addressing matters related to money market funds and auction rate preferred securities. Donohue said that the work on crisis-related matters did not disrupt the regular day-to-day work of the Division. He reviewed the rulemaking initiatives that were completed over the past year but expressed disappointment that two of his goals were not achieved --Rule 12b-1 reform and investment adviser recordkeeping modernization. Those initiatives will continue into 2009.

Donohue said the Division's plan is to recommend revisions to the investment adviser recordkeeping regime and then to apply the same approach to investment company books and records. The initiative seeks to make better use of technology to maintain, create and produce records, he explained.

Given the market events of the past year, Donohue questioned whether funds and their portfolio strategies have become too complex. Assumptions were made about the liquidity of certain instruments, about the behavior of certain strategies and about the strength of certain counterparties, all of which proved wrong, he said. He believes the norm has changed and that market disruptions will be more frequent than in the past.

To the extent that funds invest in instruments that may undermine their ability to provide liquidity and to accurately value their assets, Donohue said they are moving away from the basics that once served investors well. Turbulent markets challenge a fund's ability to meet liquidity and valuation expectations, he said. However, the Investment Company Act requires funds to meet liquidity and valuation requirements in any kind of market. If funds engage in investment strategies that challenge their ability to redeem and value securities, they may irreparably harm investors' confidence in mutual funds, he warned.