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U.S. Securities and Exchange Commission

Remarks Before the ICI 2011 Securities Law Developments Conference


Eileen Rominger
Director, Division of Investment Management

December 13, 2011

Omni Shoreham Hotel
2500 Calvert Street, NW
Washington, DC

Thank you, Karrie, for that kind introduction. And good morning to everyone here today. I am very happy to be speaking at this Securities Law Developments conference, before an impressive audience of mutual fund lawyers and other professionals.

I am glad that I am speaking to you today, and not several years ago when this conference used to be called the “Procedures” conference. I was an executive in New York for many years. On Wall Street, if someone invited you to a meeting where a large number of lawyers would discuss “Procedures” … well it probably was not a good thing.

And I should interject my own procedure here, by telling you that my remarks this morning are my own, and do not necessarily represent the views of the Commission, individual Commissioners, or the staff of the Commission.1

When I first thought about coming to the Commission, I was in the process of retiring from a Wall Street asset management firm. At that time, I was asked many questions:

  • Why come to the Commission?
  • Why leave a nice life in the Northeast and move to Washington?
  • Why take on the burdens of another high-stress job?

And those were just the questions from my husband.

In the end, of course, I decided to come to Washington. My greatest hope is that my decades of experience – as a securities analyst, a portfolio manager, and a manager of portfolio managers – can be useful for the important work of the Commission.

After spending decades on Wall Street, I am glad to have made the transition from industry to government regulator. And as recent events have highlighted, I believe it is important for the government to employ – literally to employ – a real-world understanding of business practices, and an appreciation of the problems that businesses try to solve every day.

I do not see my job at the Commission as an opportunity to take off the black hat and put on a white hat. The business of finance is just that, a business. At its best, this business performs an essential function in our society. It provides investment opportunities for investors. It serves a role in allocating capital to the businesses that comprise the U.S. economy.

And whether our perspective is conducting business or regulating business, it is important to remember that it all comes down to this – the assets that the professionals manage are “other people’s money.”

The investment of client assets in mutual funds is not an exciting game, nor is it a mathematical exercise. It is the assumption of responsibility for the savings of real people. It can represent:

  • The ability to pay for health care – or not,
  • The ability to fund a child’s education – or not, and
  • The ability to retire when needed – or not.

Just as you are highly aware of this, so are we as we do our work at the SEC.

< This Past Year >

During my time at the Commission this year I have enjoyed the fast pace and the very interesting work. The achievements of the Division and the Commission have been remarkable, and I am honored to have been able to contribute during this historic time.

  • More than 90 provisions in the Dodd-Frank Act require SEC rulemaking. The Commission already has proposed or adopted rules for over three-quarters of them.
  • Of these rulemakings, the Division of Investment Management has participated in 13, and almost half of those the Commission has already adopted.
  • The Commission and staff have finished 12 of the more than 20 studies and reports that the Dodd‑Frank Act requires.
  • The Division has participated in 4 of these studies, and 3 of them are completed.

The Division also is working on many other projects and initiatives that are not related to the Dodd-Frank Act. I look forward to helping the Commission face the issues raised by these matters, and the many others that lie ahead. One of the underlying issues, of course, is how to improve what we do.

< Improvements in Gathering and Using Data >

As we enter 2012, I am particularly interested in improving the way that we on the Commission staff incorporate empirical data into the regulatory process. We have an opportunity to utilize empirical data more extensively across the range of our activities. I think this would enhance the quality of the work we do for the Commission.

For example:

  • Our rulemaking recommendations would continue to benefit from ongoing feedback and understanding of the key elements of the cost structures of investment advisers.
  • Our consideration of exemptive applications would likely benefit from continuing improvements in our analysis of the performance of certain products already in the market.
  • And our approach to disclosure would likely benefit from continuing our ongoing study of how investors actually use the materials provided, and how they make their investment decisions.

An area in which we have made great progress in utilizing data is in the collection and analysis of money market fund data — more on that in a moment.

When I worked as a securities analyst and portfolio manager, we spent most of our time analyzing financial data and other information to arrive at our decisions. For the most part, the data was readily available on EDGAR, the SEC database.

As regulators, we face far greater challenges in data analysis. Some relevant data can be difficult or very costly to obtain. Once we have obtained the data, we need to further develop our ability to effectively analyze the information so that we can derive useful insight from it. Then, we need to apply that insight in a world in which regulations must apply to all, even though business models and their related cost structures definitely are not homogenous. Further, the industry is in a constant state of change due to product innovation, global capital market trends, and an ever-shifting competitive landscape. And so drawing conclusions from any dataset requires judgment as much as quantitative expertise.

The SEC staff is actively engaged in efforts to enhance the gathering and utilization of data:

  • These efforts are evident in the increasing use of analytics by the Compliance Inspections and Examinations Office to prioritize its activities based on quantitative risk assessments.
  • They are evident in Enforcement’s use of the analysis of outlier investment performance to identify potential problem areas.
  • And they are evident in the investor testing activities in which Investment Management and the Office of Investor Education and Advocacy are engaged.
  • These efforts are also evident in the Commission’s recent request for comments on the development of a plan for retrospective review of existing significant regulations. An important part of that request relates to the existence of relevant data that the Commission should consider in selecting and prioritizing rules for review and in reviewing the rules themselves. The request for comments also asks how the Commission should assess such data in these processes.

Moving to a more information-driven process will only succeed if we can work together on this. We rely on the information you provide in comment letters. Thank you very much for the work that you and your staff devote to those letters — I know they are time‑consuming. To the extent that you can illustrate and support your comments with data and specific information, anecdotal or other, it will be even more helpful in advancing our goal.

I also appreciate your efforts to offer constructive solutions to the issues raised by the Commission.

I assure you that we give a great deal of focus and attention to the substantive responses we receive.

The agency is also continuing to invest in Information Technology resources across most divisions. We are in the planning stages for significant improvements in the technology infrastructure for the Investment Management Division. We already benefit from the collection of data about investment advisers through the IARD system. We also look forward to receiving and compiling data about private funds through IARD in the future. And in the coming year, the Division will invest in staff who have relevant experience in data and financial analytics.

< Money Market Funds >

The SEC’s oversight of money market funds is a good example of our continued focus on improving information collection and utilization. As a result of the first phase of money market reform approved by the Commission in February 2010, we have been receiving detailed holdings data for each of the past 12 months. This data is submitted via form N-MFP and is extensively analyzed and considered by the SEC staff.

In the last year, the Commission has received filings from over 650 money market funds each month, or about 8000 filings altogether. Each month, these funds report about 70,000 different positions in all their portfolios. We are using the data to monitor characteristics and trends of holdings, and to identify areas that raise questions. This data will also help us better assist other regulators with systemic risk monitoring responsibilities, such as Treasury and the Federal Reserve.

Lastly, this data is increasingly used as a point of reference during examinations. As our IM staff participates in exams of money market funds, we will occasionally ask questions about holdings and trends. This is helpful in gaining a general sense of the portfolio decision-making process. If you are part of one of these discussions, I encourage you to avoid reading too much into these high level questions, as it is not our intention to convey a specific point of view on these individual securities.

< Target Date Funds >

The Commission staff is gathering information not only about financial institutions and professionals. We are also looking at the types of information that investors believe are most useful when they choose their investments. For example, the Commission staff is currently conducting investor testing as part of its rulemaking efforts on target date retirement funds.

Target date fund assets as of October are about $360 billion. The new cash flow that target date funds netted last year was over 10 times what it was 10 years ago. One recent survey showed that 70% of U.S. employers who responded use target date funds as the default investment in their defined contribution plans. The increasing significance of target date funds in 401(k) retirement plans – together with the market losses suffered in 2008 – gave rise to concerns about those funds.

Last year, the Commission proposed rule changes to address concerns regarding target date fund names and information presented in target date fund marketing materials. To date, target date fund disclosures have been tested on about 1,000 investors. After we analyze the testing data and consider public comments on the proposed rule, the Division will evaluate whether to recommend that the Commission adopt rule changes to address target date funds.

Before I close, let me briefly mention a few other recent initiatives.

Recently, the Commission issued a concept release on the use of derivatives by funds. Although the use of derivatives by funds is not new, it has increased exponentially in recent years. Also, funds are now using complex derivatives that did not exist when the Commission provided guidance to funds many years ago.

I am especially interested in information regarding how funds use derivatives consistent with the leverage limitations in the Investment Company Act. Thank you for your responses, and we look forward to continuing the dialogue in this important area.

We need to ensure that our regulatory protections keep up with the increasing complexity of these instruments and the ways that funds use them. This is the right time to step back and to consider whether any changes in Commission rules or guidance may be needed.

  • Other Regulatory Notices

The Commission also has issued an advance notice of proposed rulemaking regarding a rule that provides certain issuers of asset-backed securities with conditional exclusions from the definition of investment companies under the 1940 Act. And it has issued a concept release on real estate investment trusts that invest in mortgages.

We expect to gather data and consider all the comments, in determining whether to recommend that the Commission take further action.

During this next year, I look forward to working with you on the matters I have described this morning, and on the other projects that the Division has undertaken to accomplish.

I also look forward to reviewing the information that you provide to the Commission through comment letters and other input. The information you provide can help us improve our work on the matters that lie at the heart of the Commission’s mission – investor protection and capital formation. It is important to remember that, at the end of the day, the Commission serves these important purposes, but it also serves people. It serves investors, and it serves the American economy. Every day, the headlines in the newspapers remind me of the importance of our work.

In that regard, I hope you are looking forward to this year as much as I am.

Thank you.

1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.



Modified: 12/14/2011