Monday, May 4, 2009

Chairman Schapiro's First Address to the Fund Industry

SEC Chairman Mary L. Schapiro gave keynote remarks today at the Mutual Fund Director Forum's Ninth Annual Policy Conference, her first address to the fund industry since her appointment. Schapiro both opened and closed her remarks by emphasizing the importance of independent fund directors. Indeed, she stated at numerous points in her remarks that, at a time when investor confidence in our markets has been severely shaken, directors have a more important role in protecting investors and helping restore investor confidence than ever. She also noted the key role of directors in helping the fund industry deal with the issues and problems that have arisen from declining assets and declining prices in the markets:

Mutual fund managers, like all participants in the financial services industry, are under tremendous pressure in light of the market downturn. There will be temptations and economic pressure to cut corners, decrease investor services and even take on additional investment risks to try to make back some of what has been lost. As fund directors, you are the ones who stand between a good idea for investors and a bad one. You will be the ones fighting for a square deal for your fund when some may want to follow a course of action that may benefit fund managers over fund investors.

The core of Schapiro's remarks focused on six areas in which the Commission would be taking action to help restore investor confidence:

  1. Regulation of Short-Selling – Chairman Schapiro began by stating that the Commission would comprehensively reconsider its approach to short-selling, with a view to ensuring that short sales could not be used to manipulate the markets or lead to distorted pricing in the securities markets. Schapiro noted that although the Commission's elimination of the uptick rule in 2007 was undertaken only after extensive study and careful consideration, recent events in the markets, and the effect that abusive short selling potentially can have on the markets and on investor confidence requires that the Commission reconsider its approach in this area. The Commission has already proposed a number of potential approaches, including reinstitution of various forms of the uptick rule and the adoption of circuit breakers, and will be holding a roundtable on the regulation of short selling on May 5.

  2. Access to Corporate Proxies – Chairman Schapiro stated that the Commission was considering rule proposals that would provide shareholders with “meaningful access” to corporate proxies, including the ability to nominate directors. She emphasized that proxy access adds legitimacy to the entire process, and stated that in her view, “empowered investors” are confident investors, thus linking the SEC's approach to this issue with the need to restore investor confidence. She also reminded fund directors of the critical role they play in this area, and urged fund directors to remember that they have an obligation to ensure that their mutual funds vote their proxies in the interests of their shareholders.

  3. Review of Money Market Fund Regulation – Chairman Schapiro recognized the fundamental importance of money market funds, both to investors and to the capital markets generally, but emphasized that, in light of the events of the past year, the SEC would engage in a comprehensive reexamination of how money market funds are regulated. She characterized the ICI's recent recommendations on money market fund regulation as a “constructive first step,” but stated that the SEC's proposals in this area would “extend beyond those advocated in the ICI's report” and would include not only examination of current restrictions on credit quality, maturity and liquidity, but also consideration of whether a floating NAV would better protect money market fund investors. Schapiro stated that she expected the Commission's staff to make initial recommendations by June, and emphasized that as the rulemaking process progressed, she would highly value the input of fund directors, who have been “front row spectators and on-the ground participants” in the events of recent months.

  4. Target Date Funds – Chairman Schapiro stated that although target date funds have been and will remain very popular, they present a number of regulatory challenges. In particular, she noted that many target date funds base their asset allocation strategies on an assumption that fund investors will ultimately withdraw their investments slowly, maintaining part of their investment while living off the proceeds of what they redeem. She stated that if this is the case, it must be disclosed clearly. She also noted that if this is the case, a particular target date fund might be appropriate for retirement savings, but clearly inappropriate for saving for college in a 529 plan. She strongly reminded directors that they should ensure that disclosure for target date funds was accurate and that the funds' investment strategies were properly aligned with investor expectations, noting that the SEC would be looking at the same issues.

  5. Rule 12b-1 – Chairman Schapiro reaffirmed her commitment to a reexamination of Rule 12b-1, stating that the Commission must address that issue “with the interests of fund investors first and foremost in our minds.” She recognized, however, that review and possible reform of 12b-1 must be done at the appropriate time, and that a number of other SEC initiatives, including those outlined above, are likely to be addressed first.

  6. Jones v. Harris – Chairman Schapiro also stated that she recognized the importance of this case to fund investors, fund directors and the fund industry generally, and stated that the Commission would be filing an amicus brief in the matter. For prior analysis of this case, see

The full text of Mary Schapiro's remarks is available at

An audio recording of Mary Schapiro's address, including the question and answer session following her address, is available at: