By Suzanne Barlyn and Sarah N. Lynch
WASHINGTON (Reuters) - The top U.S. securities regulator
plans to examine how the advisory industry pays mutual fund
distributors, as well as broader trends and risks involving
U.S. Securities and Exchange Commission examiners will kick
off the first of two "sweeps" next week, the SEC's Office of
Compliance Inspections and Examinations Deputy Director, Andrew
Bowden, said on Friday at an Investment Adviser Association
conference in Arlington, Virginia.
The first sweep will examine the different payments made to
mutual fund distributors, including revenue-sharing, fees paid
to industry conference sponsors and so-called "12b-1" fees,
which are deducted from mutual funds to pay for fund promotion
and other shareholder services.
"If you talk to anyone in the business, they'll say a lot
has changed in distribution during the last 10 years," Bowden
He added that a sweep by the SEC will help the agency gain a
better understanding of these payments and what the money is
used for. The SEC will also be looking more carefully at the
oversight of these payments by mutual fund boards.
He declined to say how many firms would be examined.
The SEC has been interested in exploring reforms to rules
governing 12b-1 fees for some time now.
The fees came about in the late 1970s when funds were losing
assets faster than they were able to attract new ones. But over
the years, the fees have evolved to pay not just for
advertising, but also to pay intermediaries that sell shares.
In July 2010, the agency proposed rules that would
restructure the way mutual funds pay for the marketing and sale
of their shares amid concerns that some investors were paying
proportionately more than others. The rules would have also
eliminated hidden sales charges.
However, the SEC has still not finalized the rules.
In a 2011 speech, SEC Commissioner Elisse Walter, who is now
serving as chairman, said she did not expect the agency to
finalize the rules until it was finished with regulations
required by the 2010 Dodd-Frank Wall Street Reform law.
However, Bowden told reporters on Friday that the results of
the examinations could "possibly" be used to revise the
PRIVATE FUND ADVISERS ALSO TARGETED
In addition to the sweep on fees paid to mutual fund
distributors, Bowden said the SEC is planning a sweep on the
$200 billion alternative fund industry.
The review comes after over 4,000 private fund advisers
registered with the SEC for the first time last year, a new
requirement under the 2010 law.
In an announcement last month on examination priorities in
2013, the SEC said it was looking more closely at alternative
and hedge fund investment strategies in open-end funds,
exchange-traded funds and variable annuity structures.
The agency planned to focus on whether leverage, liquidity
and valuation policies complied with regulations and also
whether boards, compliance personnel and back offices were
properly staffed and funded.
"We've seen some really interesting structures for those
funds," Bowden said.
He added that the structures include setting up offshore
entities to get more exposure to various derivatives, swaps and
other types of commodities.
While some of those strategies have worked successfully for
private funds, regulators need more information to determine
whether they are sensible, he added.
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