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Atkins Reviews Recent Rulemaking Initiatives

In remarks before the National Association for Variable Annuities on June 28, Commissioner Paul Atkins outlined his views on the matters remanded to the SEC by the U.S. Court of Appeals for the District of Columbia Circuit a day in advance of the Commission's vote to again approve governance rules relating to the percentage of independent directors and having independent chairmen for mutual fund boards. He expressed disappointment with what he saw as the cavalier attitude with which the SEC responded to the court's directive and said it added to the growing list of SEC actions that have given short shrift to the fundamental concepts of due process. Atkins' prepared remarks were posted on the SEC's Web site.

Atkins said he is not opposed to a fund having a non-executive chairman or to any particular percentage of independent directors. He simply believes that independent directors, already a majority under existing SEC rules, can decide how best to organize the governance of their funds. He said the SEC had conducted no comprehensive reviews before taking the regulatory action, which instead reflected the majority's instincts and beliefs about how mutual funds should be governed. This is an area in which investors in the marketplace, given the necessary information, can make their own decisions, in Atkins' view.

Atkins said that another area in which the SEC should act judiciously is with its point-of-sale and confirmation disclosure proposal which was published for a second round of comments in February. It is a worthy goal to provide investors with clear and concise information, according to Atkins, but the point-of-sale disclosure may not be the place to do it. He suggested that the SEC could instead revise existing disclosure rather than add another layer of disclosure. If investors want comprehensive information, Atkins said the SEC should take a comprehensive look at the disclosure for mutual funds and related products.

Atkins explained that, based on comments in response to the 2004 proposal on point-of-sale disclosure, the SEC published for additional comments new disclosure forms tailored for variable annuities. However, he fears that the complexity of variable products may overwhelm the proposed disclosure forms.

Atkins said he is encouraged by the new focus on tapping the great potential of the Internet to provide information to investors. If the SEC chooses to pursue Internet-based disclosure, it will still ensure that investors without access may obtain the same disclosure on paper upon request.

Atkins reviewed the SEC's recent rulemaking to clarify the separation between broker-dealer and investment advisory activity, but said its attempts have been controversial with both groups. While it was difficult to draw a line between their activities, Atkins said the process led the SEC to take a more expansive look at the issues that go beyond the rulemaking and to consider whether changes should be made to the broker-dealer and investment adviser regulatory schemes.

Atkins also talked about the SEC's adoption of a voluntary redemption fee rule for funds to deter abusive trading, and the requirement for financial intermediaries to provide information to funds about shareholder transactions to ensure compliance with funds' market timing prevention instructions. The compliance date does not take effect until October 2006, but Atkins said he has heard concerns about the provisions. The SEC continues to consider whether it should adopt uniform standards as requested by some in the industry.

Finally, Atkins discussed his view of the SEC's enforcement actions and said the SEC must be disciplined. Firms with strong compliance policies and procedures and the individuals who comply with them should not live in fear of enforcement actions, he said. The SEC should expect those subject to enforcement actions to assert legitimate defenses, he said. The staff must avoid rulemaking through enforcement and assess the behavior against the laws and regulations that are in place at the time of the conduct, he explained. A regulator's failure to provide clear standards compromises private sector compliance efforts, he said.