Andrew J. Donohue, director of the Division of Investment Management at the SEC, said the change in the market over the past two years necessitates a change in the Commission’s regulatory agenda.
Specifically, in his speech at the Investment Company Institute’s 2009 Mutual Funds and Investment Management Conference, Donohue said the SEC is deferring “wholesale reconsideration of rule 12b-1.’
Donohue noted that the basis for the SEC’s determination in 2007 that it was time to reconsider the rule (see “SEC: Stay Tuned for 12b-1 Changes’) was that when it was adopted in 1980, the fund industry was in a very different state than it was in 2007. “There had been a period of net redemptions, and there was a concern that if funds were not permitted to use a small portion of their assets to facilitate distribution, they might not survive. In 2007, fund assets were over $10 trillion and the industry had not been through a period of sustained net redemptions. Extinction certainly did not seem to be a threat,’ he said.
However, the market again has changed.
“Just as you are adjusting to the new market realities, we also need to adjust and reconsider our regulatory priorities to ensure that limited resources are employed where they can provide the greatest impact and benefit to fund investors. I believe that it would be wise in the current market environment, for us to defer consideration of rule 12b-1 reform for this year. We should address a few fundamental matters that directly impact investor protection concerns. For example, we urgently need to reconcile the diverse regulatory regimes governing investment advisers and broker/dealers, and alleviate the uncertainty in the industry emanating from this unresolved matter,’ Donohue said.
Saying the Commission is still committed to 12b-1 reform, Donohue noted that “the factors investment company boards must consider when approving or renewing a rule 12b-1 plan are outdated and may detract from effective board oversight.’ He suggested it may be useful to consider exploring other potential means of addressing issues associated with the rule, such as the possibility of providing guidance to fund directors to better assist them in this area.
Industry experts have predicted that the SEC might move to defer 12b-1 regulation. A survey by Cerulli Associates in October found that 36% of asset managers see fees and revenue-sharing concerns moving to the back burner as the SEC has “bigger fish to fry.’ (See “Cerulli: Courts Could Decide Fee Regulation.’)
The full text of Donohue’s speech is available here.