- Financial Services
- Retirement Security
Statement of the Investment Company Institute
On the U.S. Securities and Exchange Commission's Appropriations for Fiscal Year 2011
Subcommittee on Financial Services and General Government
Committee on Appropriations
April 27, 2010
The Investment Company Institute 1 appreciates this opportunity to submit testimony to the Subcommittee in support of the Administration’s FY 2011 Appropriations request for the Securities and Exchange Commission (SEC). We commend the Subcommittee for its consistent past efforts to assure adequate resources for the SEC. For the reasons expressed below, we urge Congress to provide appropriations at least at the funding level requested by the President.
Importance of a Well-Funded and Effective Securities Regulator
Registered investment companies (RICs) 2 and their shareholders have a strong stake and vested interest in a well-funded and effective SEC. RICs are one of America’s primary savings and investment vehicles for middle-income Americans. All told, 88.5 million shareholders in 51.2 million U.S. households owned some type of registered fund in 2009. 3 At year-end 2009, total RIC assets were more than $12.16 trillion. These funds, and their millions of investors, benefit from the SEC’s vigilant regulatory oversight.
RICs are an integral part of our economy in another way, as well. In addition to their role as the investment vehicle of choice for millions of Americans, investment companies have been among the largest investors in the domestic financial markets for much of the past 15 years and held a significant portion of the outstanding shares of U.S.-issued stocks, bonds, and money market securities at year-end 2009. 4 Indeed, investment companies as a whole were one of the largest groups of investors in U.S. companies, holding 28 percent of their outstanding stock at year-end 2009. 5 As major participants in the stock, bond, and money markets, RICs benefit from strong regulatory oversight of these markets.
In the wake of the financial crisis, Congress must provide the SEC with the resources it needs to successfully pursue its investor protection and market oversight missions.
The Administration’s FY 2011 budget proposes SEC funding at $1.258 billion, which represents a 12 percent increase over its FY 2010 budget. The SEC explains that much of the increased funding would be used to enhance the agency’s professional staffing, noting that under the SEC’s current funding level, the agency’s workforce remains about one percent below FY 2005 levels. 6 It is imperative that the SEC have the resources to perform its oversight functions. We strongly encourage Congress to provide the SEC with funding to improve not only the level of staffing, but also the depth and quality of its professional staff. The SEC has begun that process under Chairman Mary Schapiro’s leadership. It has hired seasoned industry professionals and market experts in its newly created Division of Risk, Strategy and Financial Innovation and specialized attorney fellows in other divisions. These hires are very important for the SEC. Senior staff with practical perspectives enhance the agency’s ability to keep current with market and industry developments and better understand the impact of such developments on regulatory policy. We believe more can and should be done, however, particularly in developing strong economic research and analytical capabilities at the agency. The SEC should have sufficient funding to have economists for each division.
Scope of Authority
The ongoing regulatory reform debates have generated a great deal of discussion about the proper scope of the SEC’s authority. Two aspects of this debate relate specifically to the funding of the SEC: whether it should have expanded authority with respect to advisers, derivatives, and municipal securities; and whether it should be permitted or required to delegate oversight of investment advisers to a self-regulatory organization (SRO).
Expanded authority over certain advisers and derivatives. The Administration has proposed legislation to require advisers to hedge funds and other private pools of capital to register with and report information to the SEC under the Investment Advisers Act. The Administration has also proposed to grant the SEC greater authority to regulate securities-based over-the-counter derivatives. Versions of these provisions are contained in H.R. 4173, the “Wall Street Reform and Consumer Protection Act of 2009,” passed by the House of Representatives last December, 7 and S. 3217, the “Restoring American Financial Stability Act of 2010,” introduced on April 15th. 8
Expansion of the scope of the agency’s regulatory responsibilities with respect to hedge funds and derivatives, as well as in other important areas such as municipal securities, will require significant additional resources. For example, the SEC’s statement notes that the number of registered entities will grow by thousands more if the Administration’s legislation is enacted to require oversight of advisers to hedge funds and other private pools of capital. 9 If the SEC’s authority is extended in these areas, the SEC must have sufficient staffing and resources to effectively perform its new oversight functions.
The concept of an adviser SRO. Some have proposed granting an SRO rulemaking and enforcement authority under the Investment Advisers Act of 1940. This approach was rejected by the House of Representatives when it considered H.R. 4173.
Instead of delegating responsibility to an SRO, we believe Congress should approve funding for the SEC at a level that allows it to enhance its existing, experienced oversight function and adequately oversee all investment advisers. We believe the SEC is a far more appropriate primary regulator for advisers, especially those that advise mutual funds. The SEC has been overseeing advisers since 1940 under the Advisers Act, which sets out a principles-based approach specifically designed to regulate those entities providing advice. Advisers to mutual funds also are subject to the Investment Company Act of 1940 and its rules, which create a comprehensive framework regulating all aspects of the registered fund business. Delegating oversight of certain advisers to an SRO, and providing the SRO with rulemaking authority under the Advisers Act, would create potentially different and conflicting rules and standards, a result that may be especially burdensome for advisers to funds. Moreover, it could create a situation where advisers affiliated with broker-dealers are regulated according to standards that differ from those by which independent, standalone investment advisers are governed, contrary to current efforts towards regulatory harmonization.
Funding the SEC
Both H.R. 4173 and S. 3217 include self-funding provisions. H.R. 4173 includes a provision that would give the SEC the authority to collect fees from registered investment advisers to recover costs of inspections and examinations. 10 S. 3217 includes a broader provision on SEC self-funding. 11 Consistent with our long-standing and strong support for adequate funding for the SEC, we support the concept of a self-funded SEC and do not oppose these provisions.
The SEC, the fund industry, and its investors share a common objective in having a well-funded and effective SEC. The SEC must have sufficient resources to adequately fund the staffing of the agency and to take other steps to fulfill its mission of protecting the nation’s investors, including the almost 90 million Americans who own mutual funds and other registered investment companies. These investors deserve the benefits of an SEC that can soundly and effectively regulate securities offerings, market participants, and the markets themselves.
Accordingly, we urge Congress to provide appropriations at least at the funding level requested by the President.
We appreciate your consideration of our views.
1 The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $11.66 trillion and serve almost 90 million shareholders.
2 Fund sponsors offer four types of registered investment companies in the U.S.—open-end investment companies (commonly called “mutual funds”), closed-end investment companies, exchange-traded funds (ETFs), and unit investment trusts (UITs).
3 See “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2009,” Investment Company Institute Fundamentals 18, no. 7 (December 2009), avail. at http://www.ici.org/pdf/fm-v18n7.pdf.
4 Investment Company Institute, Investment Company Fact Book (50th ed. 2010), forthcoming, at p. 11. For published information for year-end 2008, see Investment Company Fact Book (49th ed. 2009), available at http://www.icifactbook.org.
7 See H.R. 4173, Title III (the Derivative Markets Transparency and Accountability Act) and Title V, Subtitle A (the Private Fund Investment Advisers Registration Act).
8 See S. 3217, Title IV (Regulation of Advisers to Hedge Funds and Others) and Title VII (Improvements to Regulation of Over-the-Counter Derivatives Markets) (avail. at http://banking.senate.gov/public/_files/TheRestoringAmericanFinancialStabilityActof2010AYO10732_xml0).
9 See Congressional Justification FY 2011 in Brief, at p.4.
10 See Sec. 7302 of H.R. 4173.
11 See Sec. 991 of S. 3217.