U.S. Securities & Exchange Commission Commissioner Luis Aguilar spoke Wednesday at a mutual fund director's event on "Taking an Informed Approach to Issues Facing the Mutual Fund Industry," and he criticized FSOC and the OFR, and defended the SEC's turf overseeing mutual funds and money market funds. Aguilar comments, "There are a number of issues that are important to the asset management industry, including the Commission's recently proposed reforms to money market funds.... However, today I would like to focus my remarks on the following topics: First, the need to utilize the Commission's expertise in overseeing the asset management industry, including evaluating the risks that the industry may pose to our financial markets."
He says, "To name just a few examples in the rulemaking space, in the last few years the Commission has adopted rules to enhance the custody practices of investment advisers, rules to prohibit pay-to-play activities in the investment advisory industry, amendments enhancing Commission oversight of certain private fund advisers, and, in 2010, the Commission significantly reformed money market funds. Moreover, as is well known, we are currently considering additional reforms to money market funds."
Aguilar tells us, "The Commission has also been active in bringing various enforcement actions. For example, over the past three years, the SEC has brought more than 430 cases relating to investment advisers and investment companies, some of which involved mutual funds and their advisers. For example: In November 2013, the SEC brought fraud charges against Ambassador Capital Management, an investment advisory firm, and a portfolio manager for misleading the trustees of a money market fund, and for failing to comply with rules that limit risk in a money market fund's portfolio."
He talks about "FSOC and OFR's Recent Foray into the Money Market Fund and Mutual Fund Industry," saying, "Recently, however, the Commission's authority in the mutual fund industry -- an industry in which the SEC has capably served as the primary regulator for almost 75 years -- has been undercut by the activities of the Financial Stability Oversight Council ("FSOC") and its research arm, the Treasury Department's Office of Financial Research ("OFR"). In particular, FSOC has focused its sights on various aspects of the asset management industry. Obviously, this is an area where the SEC has a great deal of expertise."
Aguilar continues, "Initially, FSOC focused on money market funds. FSOC's attention to this issue began in 2010, shortly after FSOC was created by the Dodd-Frank Act. Specifically, FSOC called for reforms to address what it viewed as structural vulnerabilities in money market funds that left them susceptible to shareholder runs. As this group knows, the financial crisis of 2008 put pressure on various money market funds, with the most public example being The Reserve Fund "breaking the buck" in September 2008. `In response, in 2010, the Commission acted to adopt amendments to make money market funds more resilient to short-term market risks and provide greater protections for investors."
He adds, "In late 2011 and early 2012, the SEC began to consider further money market reforms. However, at that time, a majority of the Commission felt it was appropriate, and responsible, to study the effects of the Commission's 2010 amendments regarding money market funds before taking additional action. Also at that time, the SEC staff informed the Commission that it could complete such a study in only five to six weeks. For reasons I have never understood, the SEC staff was not authorized to do the study until late in 2012, and the study was not made available to the Commissioners until November 30, 2012, after the announcement of the then-Chairman's departure."
Aguilar tells us, "However, after receiving this study, and the data it contained, the Commissioners began productive discussions that led to a set of proposals to further reform the money market fund industry. The full Commission unanimously approved these proposals on June 5, 2013. The SEC staff continues to work on this matter and, just last week, published additional data analyses relating to money market fund reform. I am hopeful that the final rules will soon come to a vote. It is important for the Commission to bring closure to this issue and I am pleased that real data is being utilized in the process."
He continues, "More recently, FSOC and OFR have focused on a wider swath of the asset management industry. In particular, FSOC charged OFR with studying the activities of asset management firms in order to aid FSOC in deciding whether to subject certain aspects of the industry to enhanced prudential standards and supervision. In September 2013, OFR published what it considered a study of the asset management industry. I recommend that you read the report in its entirety; however, in sum and substance, the report concluded that asset management firms and their activities "introduce vulnerabilities that could pose, amplify, or transmit threats to financial stability.""
Aguilar states, "The report should not take you very long to read. The OFR report, which purported to analyze the risks posed by the entire multi-faceted asset management industry, is only 34 pages long, and the report virtually ignored the hedge fund industry and the private equity industry. By contrast, the SEC staff's November 30, 2013 study, which focused only on certain aspects of money market funds, was 98 pages long. Although neither FSOC nor the OFR chose to solicit public comment on the report, the report was posted on the SEC's website and public comments were solicited. Subsequently, OFR's report received near universal criticism from academics, investor advocates, lawmakers, asset management firms, industry groups, and others. The criticisms generally referred to the report's quality, research, and analysis."
He adds, "However, rather than continuing to discuss the merits of the research and analysis -- or lack thereof -- in OFR's report, I would simply note that there needs to be a mechanism by which the full Commission, not just the Chair and SEC staff, provide meaningful input and coordinate with the leadership of FSOC and OFR.... Let me be clear, the work of FSOC and OFR to identify and mitigate systemic risk is important. However, there is real danger in that work being compromised if the full five-member Commission is cut out of the process. The SEC and our fellow regulators should assist FSOC's efforts in a thorough and objective manner. My interest is in making sure that the full expertise and judgment of the Commission -- and all the Commissioners -- is being utilized, and that our authority and expertise are not being undercut. For the protection of our economy, financial regulators across the U.S. federal government have to work together to address risks and threats to the stability of our financial markets."
Finally, Aguilar says, "Before leaving the subject of the OFR report, I note that just last Friday, the Department of the Treasury announced that FSOC will hold a conference in May on the asset management industry and its activities. While I welcome the effort to better understand the asset management industry, this does not address the issues arising from the criticisms of the OFR report's quality, research, and analysis, or the issues that arise when the SEC's decision makers are excluded from the process. FSOC and OFR should acknowledge the Commission's -- and, in particular, the Commissioners' -- role as the primary regulator of the asset management industry."
