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Remarks before the 5th Annual DCIIA Public Policy Forum

David W. Grim

Deputy Director, Division of Investment Management[1]

Washington, DC

April 3, 2014

I. Introduction

Good afternoon and thank you for that kind introduction. It is a pleasure to be here today to speak with you about the work of the SEC’s Division of Investment Management. Before I begin, it is my obligation to remind you that my remarks today represent my own views and not necessarily the views of the Commission, the individual Commissioners or my colleagues on the Commission staff.

As you know, the Division works to support the Commission’s mandate to protect investors, ensure fair and orderly markets, and promote capital formation. In particular, we support this mandate by protecting investors, promoting informed investment decisions, and facilitating appropriate innovation in investment products and services through regulating the asset management industry. At the outset, I wish to praise the Division staff for all of their hard work. The Division is filled with so many talented people who are committed to fulfilling our critical mission. I am pleased with our progress and hope to build on our success throughout the year.

As we know, one of the key issues facing Americans is investing for retirement. In the past, many Americans were able to rely on a combination of Social Security and company-sponsored defined benefit pension plans to provide for their retirement needs. Today, however, individuals are increasingly dependent on participant-directed vehicles, such as 401(k) plans, that make them not only responsible for accumulating sufficient assets for their retirement but also for constructing and managing their own retirement portfolios. The Division plays an important role in the oversight of the asset management industry and many of the investment options that are available through 401(k) and other retirement plans. For example, many of our initiatives affect 401(k) and other retirement plan participants as well as plan sponsors and those who provide investment management and other services to retirement plans. We appreciate efforts by Commission stakeholders in serving the important goal of helping America’s investors meet the challenge of saving for retirement.

My remarks today will focus on five areas that I think you may be interested in: target date funds, money market fund reform, the variable annuity summary prospectus, the investment adviser/broker-dealer initiative, and the rollover of retirement plan assets.

II. Division of Investment Management Initiatives

A. Target Date Funds

Target date funds are a prime example of an industry innovation developed to meet the incredibly important and shifting challenge of retirement stability to American investors. These funds have become increasingly prevalent in 401(k) plans since the Department of Labor, in 2007, began to permit them to be used as a default option for plan participants who do not make their own investment elections.[2] According to a recent Morningstar study, assets of target date funds exceeded $500 billion in 2013.[3] As you know, target date funds generally invest in a diverse mix of asset classes, including stocks, bonds, and cash and cash equivalents. As the fund approaches its target date — usually the investor’s approximate retirement date — it shifts its asset allocation in a manner that is intended to become more conservative.

In 2010, the Commission proposed rules regarding target date funds in order to address concerns about investor understanding of those funds. The proposed rules would require target date fund marketing materials to include an asset allocation glide path illustration — a table, chart, or graph showing the shifting asset allocation over the life of the fund.[4] In April of last year, the Commission’s Investor Advisory Committee submitted a set of findings and recommendations relating to target date funds.[5] Among them was a recommendation that the Commission develop a glide path illustration for target date funds that is based on a standardized measure of fund risk as a replacement for, or supplement to, the proposed asset allocation glide path illustration. The staff is currently preparing for the Commission’s consideration a request soliciting additional comment on standardized risk-based glide path illustrations for target date funds so that we can benefit from additional feedback from commenters.

B. Money Market Funds

Another important initiative of the Division is money market fund reform. As you likely know, the failure of the Reserve Primary money market fund during the 2008 financial crisis and the associated heavy redemptions from other money markets funds that came in its wake prompted us to revisit the way money market funds are regulated. In 2010, we adopted a first set of reforms, which significantly enhanced the resiliency of these funds, but did not address certain of the incentives that may cause money fund investors to redeem heavily during times of market stress. As you may know, in June of this past year, the Commission proposed additional money market fund reforms. This proposal is designed to lessen money market funds’ susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from high levels of redemptions, and increase the transparency of their risks, while preserving, as much as possible, their benefits.

The proposal includes two principal alternative reforms that could be adopted alone or in combination. The first alternative is a floating NAV. Under this approach, prime institutional money market funds would be required to transact at a floating NAV priced to the fourth decimal place, not at a stable $1.00 share price. This requirement would not apply to government and retail money market funds, which would be exempt from the floating NAV proposal.

The second alternative allows the use of liquidity fees and redemption gates in times of stress. Under this approach, money market funds would continue to transact at a stable $1.00 share price; but if a money market fund’s liquidity is depleted beyond a certain threshold, the fund would be required to impose a liquidity fee on all redemptions, unless the fund’s board determines that such a fee is not in the best interest of the fund. Once a money market fund crosses the liquidity threshold, its board could also temporarily suspend redemptions for up to 30 days.

The proposal also includes a variety of other measures, such as tighter diversification requirements, improved stress testing, and enhanced disclosures that would apply under either alternative.

The comment period for the proposal closed in September of last year. The staff is currently reviewing and analyzing the more than 1400 letters we have received on the proposal to date and is preparing an adoption recommendation for the Commission. In addition, last week, the staff made available certain analyses by the Division of Economic and Risk Analysis which evaluated data and academic literature related to money market reform that have the potential to be informative in evaluating the final reform. The staff made these available to allow the public to consider and comment on this information – comments should be received by April 23rd. As Chair White has said, adopting a final rule on money market mutual funds is a critical priority for the Commission in the relatively near term of 2014.

C. Variable Annuity Summary Prospectus

Focusing on potential reforms to variable annuity disclosure is also a current matter on which Division staff is working. As you may know, the features and pricing of variable annuities can be complex and difficult for investors to understand. Our efforts on this project are critical to improving communications about these products, which are sold to seniors and others who are seeking ways to fund their retirement. The Division continues to believe that the mutual fund summary prospectus, adopted in 2009, and now used successfully by so many funds, may offer a useful model for providing variable annuity disclosure. It is admittedly a challenge — and a very worthwhile one — to boil down long and complex disclosure about variable annuities into the key facts that investors need to know about the limitations and costs, as well as the benefits, of their investment. For example, we are considering whether to recommend that the Commission require key information to be disclosed to new investors in a standardized order, e.g., contract benefits, risks, fees and charges, and investment options. In addition, we are considering whether it would be useful to tailor disclosure for existing investors making additional purchase payments. For example, it may be helpful to limit disclosure for existing investors to a summary of changed information to avoid repeated delivery of information about the contract that does not change. We are also considering ways to reduce costs, such as by eliminating print delivery where investors do not find it helpful, while also making paper copies of electronic documents available on request at no cost. We are committed to attacking the problem of long and complex disclosure for each variable annuity that will tell the full story — the key facts that investors need to know about the risks and costs, as well as the benefits, of their investment.

D. Investment Adviser/Broker-Dealer Initiative

The Commission is also committed to considering the appropriate next steps on the investment adviser and broker-dealer initiative. Section 913 of the Dodd-Frank Act granted the Commission broad authority to impose a uniform fiduciary standard for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. As Chair White recently noted, the question of whether and how to use this authority is very important to the Commission and to investors.

In order to more fully inform the Commission’s decision on this matter, Chair White has directed the staff to evaluate potential options available to the Commission, including a uniform fiduciary standard for broker-dealers and investment advisers when dealing with retail customers, and other measures that may be more targeted and achievable in the shorter term. Chair White has made it clear that the evaluation of potential options is an immediate and high priority so that the Commission has the information it needs to come to a decision as to whether and, if so, how best to exercise the authority provided in Section 913 of the Dodd Frank Act.

III. Rollover of Retirement Plan Assets

Before I close, I would like to mention that our colleagues in OCIE’s National Exam Program have indicated that as part of their examination priorities for 2014, they will undertake several initiatives related to the rollover of retirement plan assets. For example, the National Exam Program mentioned in its examination priorities that staff will review the sales practices of investment advisers that target retirement-age workers to roll over their 401(k) plans into higher cost investments, including whether advisers are misrepresenting their credentials or the benefits and features of IRA plans or other alternatives. The examination priorities also indicated that staff will examine broker-dealers and investment advisers for possible improper or misleading practices when recommending the movement of assets from a retirement plan to an IRA in connection with a customer’s or client’s change of employment. We look forward to learning about OCIE’s findings on these important topics.

IV. Conclusion

Thank you for listening this afternoon. I appreciate the opportunity to review our work in the Division of Investment Management, and I look forward to sharing our accomplishments with you. Your input is important to us as we continue our work, and I hope that you will continue to engage with us throughout year. Thank you again and enjoy the conference.

[1] The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

[2] See Default Investment Alternatives Under Participant Directed Individual Account Plans, 72 FR 60452, 60452–53 (Oct. 24, 2007).

[3] Morningstar Fund Research, Target Date Series Research Paper: 2013 Survey, available at
2013TargetDate.pdf (last visited March 25, 2014).

[4] Investment Company Advertising: Target Date Retirement Fund Names and Marketing, Securities Act Release No. 9126 (June 16, 2010) [75 FR 35920 (June 23, 2010)].

[5] Recommendation of the Investor Advisory Committee: Target Date Mutual Funds (Apr. 11, 2013), available at

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