Investment Company Institute president talks fiduciary rule, regulations for asset managers

Paul Schott Stevens
Investment Company Institute (ICI) President and CEO Paul Schott Stevens discussed balancing regulation with economic growth during his state of the asset management industry address at the ICI General Membership Meeting in Washington held last week.

“Stronger [economic] growth is a crucial part of the solution to so many challenges for our society. And reducing excessive regulation is a crucial part of the solution to sluggish growth,” Stevens said. “But regulation that is unnecessary or inappropriate; that is based in faulty analysis; that is not informed by robust public comment—regulation of that sort can and does hurt fund investors and impose huge costs on our economy and our society.”

He also discussed the new course of the Securities and Exchange Commission (SEC), which announced Jay Clayton as the new commission chairman last week. Clayton was a former partner at Sullivan and Cromwell LLP. He replaces Mary Jo White, who stepped down in January.

Stevens said the SEC can help funds play a role in economic growth by preserving the fundamental framework of fund regulation. It also ensures that all investors—whether in retirement plans or retail accounts—have access to financial advice under a best interest standard; permits funds to continue to use the most advanced investment tools and techniques; and brings our means of communications with fund shareholders into the 21st century.

The ICI president also said the organization is “deeply disappointed” that the Department of Labor’s fiduciary rule for investment advice was only delayed by 60 days.

“Our members report that hundreds of thousands of small retirement accounts have been ‘orphaned’ since the Department of Labor (DOL) finalized the rule. Faced with the sizable if uncertain legal and regulatory risks of assuming DOL fiduciary status vis-à-vis these fund shareholders, brokers are simply resigning from small accounts en masse,” Stevens said. “All this carnage is unnecessary, because, in the end, we believe the rule must be rescinded or significantly revised.”

ICI is calling on the SEC to propose a harmonized best interest standard for broker-dealers that would enhance, rather than replace, existing suitability obligations.

“Only two bodies can lead the way on a unified best interest standard—the SEC and Congress. We hope the SEC will take the lead—but if it doesn’t, Congress should stand ready,” Stevens said.

On derivative risk management, Stevens said ICI favors a rule that combines formal risk management programs with an appropriate asset segregation regime.

“Such a rule will encourage funds to invest in the derivatives market confidently and responsibly—to the ultimate benefit of their investors,” he said.

He also mentioned that he would like to see the SEC allow online disclosures for fund companies. Currently, fund investors are burdened with an “antiquated system” of paper-based delivery for voluminous shareholder reports and other documents, Stevens said.

“The SEC should immediately adopt a rule that allows mutual funds, ETFs, and closed-end funds to meet their delivery obligations by posting required disclosure documents online and providing investors the opportunity to opt for paper,” Stevens said. “At the same time, the SEC should permit variable insurance products to develop and use summary prospectuses, delivered online. As a longer-term initiative, the Commission should review the content of fund shareholder reports to make them more useful to investors.”