Bank pools draw SEC scrutiny

The SEC is beginning to question whether investors in collective- investment trusts are sufficiently protected. The trust accounts, which allocate pooled assets to individual investment managers, are exempt from the Investment Company Act of 1940, removing the banks that sponsor them from the reach of the Securities and Exchange Commission. But Andrew “Buddy” Donohue, director of the agency's Division of Investment Management, said last week that the commission is looking for ways to claim jurisdiction. “The collective funds are out there marketing [themselves] to advisers, saying, "Give us your clients, you manage, and we'll provide the back office,'”he said at an investment management program in New York sponsored by the Practising Law Institute. Although the SEC doesn't have authority to regulate banks themselves, it can question financial advisers who participate in the funds, he said. Mr. Donohue said that examining the trusts is a priority this year because the platforms are offering a growing array of investment choices and becoming increasingly popular as retirement plan investments. On the subject of reforming money market rules to avoid another jolt to the financial system like when Reserve Management Co. Inc.'s Primary Reserve Fund broke the buck in September 2008, he said that there are no “silver bullets.” Neither the Treasury Department nor the Federal Reserve system will again be able to take drastic measures to prop up the funds, Mr. Donohue said. Meanwhile, he said, the SEC this year will almost certainly propose modifications that will affect 12(b)-1 fees charged by sellers of mutual funds. The fees were initially approved to help funds offset the marketing costs of attracting new investors. Over the years, however, the fees have evolved into “a substitute for a sales charge,” said Mr. Donohue, noting that the SEC is partially responsible because it offered various forms of exemptive relief on such fees to funds. SEC Chairman Mary Schapiro has highlighted her concern about 12(b)-1 fees, and Mr. Donohue said that his division thinks it has a way of addressing the most serious abuses, in part through heightened disclosure requirements. The purpose of any new or modified rules will be to “improve the ability of people to know what they are paying for,” he said, and to ensure that they aren't “continuing to pay a sales load for something they bought 10 years ago.” E-mail Jed Horowitz at [email protected].