December 11, 2003
Mr. Jonathon G. Katz
Dear Mr. Katz:
The Money Management Institute supports the proposed amendment of the National Securities Clearing Corporation ("NSCC") Rules to offer an information messaging service for separately managed accounts (identified as rule filing SR-NSCC-2003-21).
The Money Management Institute ("MMI") is the national organization for the managed account industry, representing portfolio manager firms and sponsors of investment consulting programs. MMI was created in 1997 to serve as a forum for the managed account industry's leaders to address common concerns, discuss industry issues and work together to better serve investors. MMI is the leading advocate for the industry on regulatory and legislative issues. MMI members are firms that offer comprehensive financial consulting services to individual investors, foundations, retirement plans and trusts, related professional portfolio management firms, and firms that provide long-term services to both sponsor and manager firms. Information on MMI is available on the MMI website: www.moneyinstitute.com.
The managed account industry has experienced rapid growth over recent years and has experienced a compound annual growth rate of 16.7% for the 7-year period ending September 30, 2003. Assets under management (AUM) total $456.29 billion the end of third quarter of 2003, based on quarterly data collected by MMI and its consultant, Financial Research Corp (FRC). FRC projects for MMI that assets under management held in separately managed accounts will approach $1 trillion by 2005 and nearly $3 trillion by 2011. The total number of individual accounts, estimated at 2 million at 2002, will increase to 4.2 million in 2005, 7.9 million in 2008 and 12.5 million in 2011.
The rapid growth of the SMA industry presents numerous challenges in the technology and operations area.1 A key area of concern is the limited scalability of the business due to the absence of centralized connectivity among sponsors and investment managers and the lack of standardized protocols for communicating and processing data. Under current processes, information is transmitted using manual and time consuming methods and the use of multiple systems in the decentralized processing flows entails a great deal of duplication of data entry. In addition to being highly inefficient, this process results in high processing costs, excessive error-related costs and inevitable delays.
In response to these operational and infrastructure concerns, the MMI commissioned Deloitte & Touche to analyze the operational interfaces in the separately managed account industry, particularly the current state of connectivity among sponsors and investment managers, and to recommend industry solutions. A copy of this study is enclosed for your information.
A principal recommendation of the Deloitte and Touche/MMI study was that the industry adopt an industry-wide approach to data standardization of data and formats and processing practices, and the creation of a platform-neutral centralized communications facility. As noted in the study and generally recognized in the industry, the parallel to the operational problems encountered by the mutual fund industry twenty years ago is striking. In fact, the current AUM in separately managed accounts (over $450 billion) is very similar to the AUM in the mutual fund industry at a comparable point in time; the growth projections are also remarkably similar. In the mutual fund industry, the various industry participants worked together to develop standard protocols and processes to achieve cost efficient operations that could function in a period of rapid asset growth. NSCC played an important role in achieving the industry-wide solutions to the very similar operational problems experienced by the mutual fund industry and the industry now relies heavily on NSCC's mutual fund services as a standardized processing and reporting platform.
Accordingly, MMI turned to NSCC to explore whether NSCC, as the industry utility, could provide services with similar operational benefits to the managed account industry, with the objective of reducing excess operation costs and risk, and to provide the infrastructure for the market to reach its growth potential. At the request of MMI, NSCC became a member of the MMI Technology and Operations Committee that was formed to assist the industry in creating and defining standardized communication elements for SMA processing. In addition to its advisory role on the committee, MMI also turned to NSCC to develop a central processing utility that would support and utilize these industry standards. It is the consensus of the Board of Governors of MMI that the presence of an industry utility such as NSCC will play an essential role in resolving the operational challenges presented by the current processing methods. This conclusion is consistent with (1) the recommendations that came out of the Deloitte & Touche/MMI study and (2) the prior experience of the industry regarding the resolution of strikingly similar problems encountered in mutual fund processing in the 1980s, problems that were resolved by standardizing and centralizing communications through NSCC.
MMI supports NSCC's efforts to design and provide a communications and processing service for the managed account industry. MMI believes it will benefit the industry and the investing public by reducing processing costs and the operational risk that is associated with manual and duplicative processes. As an additional benefit, MMI believes that centralizing communications in an industry utility such as NSCC will foster competition among service providers to the SMA industry. Use of NSCC's systems to provide a robust and economic network of connectivity among the many sponsors and investment managers that work with separately managed accounts will encourage other companies to develop new and improved front office and back office processing services, thereby benefiting the industry and the investing public.
For the reasons stated, we submit this letter in support of NSCC's proposed rule change for the provision of the separately managed account service, SR-NSCC-2003-21.
Christopher L. Davis