Tuesday, August 31, 2010

HELP WANTED: "Fund Czar" "Top Fund Cop" aka S.E.C. Director of Division of Investment Management

Did you notice that last week the S.E.C. announced that Andrew "Buddy" Donohue - the agency's Director of the Division of Investment Management - will step down in November?

As Chuck Jaffe, of MarketWatch noted in a recent column, the typical fund investor hasn't got a clue who Donohue is or what he has done in his SEC job over the last four years. Jaffe added that since industry insiders argue over whether the director of the Division of Investment Management should be called the agency's "fund czar" or its "top fund cop," there's no denying that whoever has this gig has the potential to influence a lot of key issues facing the fund industry today.

, who was global general counsel at Merrill Lynch Investment Managers before joining the SEC, was credited by the agency with improving the oversight of money-market funds, as well as for his efforts to overhaul 12(b)-1 fees in the fund industry.

Since Donohue is leaving at a key time in the evolution of mutual funds, whoever replaces him faces big issues with the potential to change the way individual investors interact with fund companies and feel about funds and financial advisers.

A primary issue is Fiduciary responsibility for advisers. On the surface, this does not seem to be a fund issue, but it clearly is. The dirty little secret of financial advice is that only some types of advisers have a fiduciary responsibility to their customers, meaning they are required by law to put their client's best interests first. Other types of adviser, most notably people acting as brokers, must adhere to a "suitability standard," meaning an investment merely must be suitable, rather than "in your best interest."

Congress was wrestling with this issue, but booted it out of the financial-reform package and kicked it over to the SEC to study by January, with proposed rules to follow soon thereafter. The new big cheese at the Division of Investment Management will have a lot of say here, and if he chooses not to protect investors on this one, it will send a big message that the new top fund cop is soft on protecting consumers and in bed with the brokerages and insurance companies.

Here are the rest of the issues that a new fund czar must help to steer and shape as listed by Jaffe in his Aug 22 Marketwatch column.
-Completed reform of 12(b)-1 fees
-Revenue sharing between funds and advisers
-Rapid trading in exchange-traded funds
-Regulate 'alternatives' that the fund world uses to dodge rules

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