Compliance May 14, 2009

SEC Proposes Tighter Adviser Custody Rules

The Securities and Exchange Comission (SEC) today proposed tighter rules for investment advisers who custody assets.
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In light of fraud of money managers such as Bernard Madoff, the SEC voted 5-0 to propose that investment advisers who hold their client’s assets undergo a surprise exam once a year to make sure those assets exist, Reuters reported.

If adopted, the amendments to the Investment Advisers Act of 1940 would require investment advisers having custody of client funds and securities to obtain a surprise examination by an independent public accountant, and, unless the client assets are maintained with an independent custodian, obtain a review of custodial controls from an independent public accountant, according to the SEC.

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The surprise exam would apply to about 9,600 of the approximately 11,000 registered investment advisers (RIAs) and includes advisers who are deemed to have custody or the ability to deduct fees from their client’s assets, according to Reuters.

The SEC also proposed requiring about 360 investment advisers who physically hold their client assets in the firm or through an affiliate to undergo a written review by a certified public accountant, the news report said. The review would describe the controls the adviser has in place, test the operating effectiveness of those controls, and provide the results of those tests. That review would have applied to Madoff.

“We are taking this action in response to major investment scams such as Madoff and many other potential Ponzi schemes,” SEC Chairman Mary Schapiro said at the SEC meeting, according to the news report. “A surprise exam would provide another set of eyes on client’s assets and provide additional protection against theft or misuse.’

The proposed SEC plan is open for public comment.

Data & Research May 14, 2009

Fund Firm Commentary for Advisers Varies

Many mutual fund firms provide advisers with commentary, but not all of them have jumped on board with new media endeavors.
Reported by

Research firm Corporate Insight looked at 17 mutual fund firms and found 94% of them offered some sort of commentary for advisers. The report found that 31% provide fund-specific commentary. Some offer multimedia commentary: 31% provide video commentary; 25% offer audio; and 13% offer podcasts.

More than half of the firms highlight new commentary pieces regularly on their homepage, but only five firms notify advisers of new content using syndicated services such as RSS feeds and podcasts. Some firms use e-mails notifications (13%) or delivery (19%).

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Four of the firms in the report—DWS Investments, MFS, Oppenheimer, and Van Kampen—allow users to launch videos directly on the homepage. Most of these are smaller videos, but Van Kampen allows the user to enlarge the player.

Corporate Insight gave these five firms a top grade for “comprehensive commentary outlets:” American Funds, AllianceBernstein, MFS, DWS Investments, and Invesco Aim. Those firms prominently highlight content on their homepage and use a variety of formats. DWS and MFS use video or audio formats.

The study noted that most firms offer a centralized outlet to organize commentary-related materials, but the quality varies. Less than half (38%) of firms in the report provide an archive of materials, which also vary in quality. AllianceBernstein has an archive dating back three years, but offers no way to sort through the materials; Fidelity offers and expandable archive, but there aren’t many articles in it, according to the report.

Corporate Insight recommends these attributes in commentary for advisers:

  • offers and promotes a central commentary outlet;
  • offers a full range of formats, from audio and video to PDFs;
  • provides an organized archive;
  • keeps advisers updated with RSS feeds and e-mails;
  • offers diverse commentary subjects about different regions and sectors.

During times of extreme market turbulence, it is even more essential for mutual fund advisers to understand the correlation of topical, current events to their mutual funds’ performance, Corporate Insight said. Commentaries in a variety of formats strengthen an adviser’s loyalty to a mutual fund firm.

 

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