SEC Names Norm Champ Director of Division of Investment Management

The Securities and Exchange Commission (SEC) named Norm Champ director of the agency’s Division of Investment Management.

Champ, a former hedge fund executive, had been deputy director of the SEC’s Office of Compliance Inspections and Examinations (OCIE). He assumes his new duties on July 9 and succeeds Eileen Rominger, who is retiring.

Champ has been with the SEC since 2010. Previously, he was general counsel for 10 years as well as a member of the executive committee and a partner at the investment management firm Chilton Investment Co., a multinational adviser to private funds and managed accounts.

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In OCIE, where he sits on the Executive and Operating Committees, Champ served as the acting head of the broker/dealer, investment adviser/investment company and credit rating agency exam programs and as acting chief counsel. Champ led the creation of the division’s first examination manual. Champ said he defined the division’s main mission as “protecting investors” rather than focusing on systemic risk.

“Norm has proven himself to be a natural leader and an expert at managing programs that bolster our financial markets and protect investors,” said SEC Chairman Mary L. Schapiro. “His breadth of experience and deep insight into so many aspects of the securities industry will well serve investors and the agency.”

During his SEC tenure, Champ received the Chairman’s Award for Law and Policy for his role in OCIE’s implementation of the Dodd-Frank Act and the Chairman’s Award for Labor-Management Relations for his role in the reorganization of OCIE.

Champ is a lecturer at Harvard Law School, where he has taught a course on private funds investment management law.

The SEC’s Division of Investment Management protects investors and promotes capital formation through oversight and regulation of the nation’s multitrillion-dollar investment management industry. The division monitors investment funds, professional fund managers, securities research analysts and investment advisers.

Champ received his bachelor’s degree from Princeton University, summa cum laude. He received his master’s degree in 1986 from King’s College University of London, where he was a Fulbright Scholar. He earned his juris doctor degree from Harvard Law School, cum laude.

 

Pension Relief Bill Presents Risks

New pension rules may provide relief for underfunded pension plans, but they can also increase risk, according to Karin Franceries of J.P. Morgan Asset Management.

“Most people hope that interest rates will go up so the value of liabilities goes down,” Franceries, an executive director in J.P. Morgan Asset Management’s Strategy Group, told PLANADVISER. “But with the funding relief, the discount rate is so smoothed over 25 years that the liability value is known over the next three years. Liabilities will not be sensitive to rates any more. This could raise a question if you are in fixed-income investments: if rates go up, your fixed-income investments will lose in value, but your liabilities will not move at all.”

That means plan sponsors might have to increase contributions when they could have decreased them had their liabilities been timely marked to market. But the new law could cloud sponsors’ judgment, tempting them to choose very short fixed-income investments to remove interest rate risk, a move Franceries strongly discourages.

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Franceries said a pension fund that appears to be 100% funded because of the new regulations but is actually 80% funded might say, “ ‘Let me switch all my assets to cash. I won’t lose money with cash.’ ” Franceries disagrees. “The assets will not appreciate in value. Your deficit could stay constant or even increase once the effects of the new bill disappear in a few years,” she stated.

The bill presents a problem in the case of decreasing interest rates. Sponsors can now calculate their liabilities based on benchmark bond rates for the 25-year-preceding period. Because interest rates were much higher before the 2008 financial crisis, the use of higher interest rates lowers pension liability calculations. (See “Despite Funding Relief, DB Contributions May Stay Above Minimum.”)

 

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But should interest rates decline in subsequent years, the jig would be up—sponsors will eventually have to increase their contributions to match the increase in liabilities, according to Franceries. “With a small decrease in rates, deficits could go through the roof once the effects of the new bill wear off,” she said. “[Plan sponsors] would be really hurt.”

Franceries equated the bill to Botox, the popular cosmetic treatment that smoothes out wrinkles. Botox wears off with time. So do the effects of the bill. It makes pensions funds look much better in the short term,” Franceries said. “But the effects will disappear in four- to five-year period.”

This raises questions: why did the government change the rules, and why now?

One possible explanation is that the government was pressured by pension plans that have to contribute much more than they did than last year due to the low interest rate environment, Franceries contended.

 

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Another possibility is that the government wanted to increase tax revenue. “If sponsors contribute less, there are less tax-deductible expenses, and more tax paid to the government,” Franceries said.

However, the government might not ultimately collect more tax revenue. Unless rates increase, sponsors will eventually have to increase their contributions, and therefore their tax-deductible expenses, she noted.

Despite the risks, Franceries said most of her clients have underfunded pension plans and probably will take advantage of the regulations. “I would assume they’ll be happy to go with the new bill,” she concluded. 

 

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