Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.
Following the market decline and credit crisis that began in 2008, regulators worldwide are looking to implement new rules governing the transparency of investment strategies and vehicles. In the United States, the Securities and Exchange Commission has adopted new regulations around money market funds, and the Department of Labor has proposed new regulations governing fees charged for investment advice offered to defined contribution plan participants. In Europe, the Institutional Money Market Funds Association also adopted changes to its Code of Practice governing money market funds, and two new proposals â€” changes to Undertakings for Collective Investments in Transferable Securities funds, and the Alternative Investment Fund Managers directive â€” could change the way investment managers do business.
In the United States and Europe, new rules are being imposed on the money market fund industry.
In the United States, the Securities and Exchange Commission (SEC) adopted several new regulations, all aimed at making money market funds more resilient to economic stresses and runs on the funds. In addition to proposals on portfolio composition, new rules include:
â€śMonthly reporting will give the public more current information, even with the lag, and could shine a light on the marked-to-market net asset value,â€ť says Brad Adams, senior product manager, Northern Trust. â€śUsing a variable net asset value would remove the need for strict rules to control risk, but could create some operational challenges.â€ť
The U.S. regulations take effect in May 2010, with staggered compliance dates.
In Europe, the Institutional Money Market Funds Association (IMMFA) adopted changes to its Code of Practice that took effect in January 2010 and are aimed at improving standards for maturity, credit quality, liquidity and disclosure. The changes include:
Two sets of proposed regulations in Europe could have far-ranging implications for investment managers beyond the continentâ€™s borders. First, Undertakings for Collective Investments in Transferable Securities (UCITS) funds â€” which have been a global success story, with assets under management of almost 5.3 trillion euros at the end of 20091 â€” have new proposals that are due to become effective in mid 2011. Second, the original draft of the Alternative Investment Fund Managers (AIFM) directive, published in April 2009, has led to intense lobbying from across the industry, both in the European Union and globally. The final version is due for approval in July 2010. Key changes to UCITS funds, and the objectives for the AIFM directive, are below:
â€śUCITS IV will potentially allow fund promoters to streamline their operations, generating cost savings for the industry,â€ť says Judith Scattergood, senior product manager at Northern Trust, London. â€śIt should also facilitate product development and improve marketing opportunities.â€ť
The directive covers not only hedge funds and private equity funds, but also traditional long-only investment funds, which are not UCITS compliant.
1 â€śTrends in the European Investment Fund Industry in the Fourth Quarter of 2009 and Results for the Full Year 2009,â€ť European Fund and Asset Management Association, March 2010.
Defined contribution (DC) plan sponsors have been demanding lower â€“ and unbundled â€“ investment management and administrative fees. Now, the U.S. Department of Labor (DOL) has proposed new regulations governing fees charged for investment advice offered to plan participants.
The DOL proposal, released in February, stipulates that advice must be provided on a â€ślevel feeâ€ť basis or through a computer model that has been certified as unbiased.
Under the level fee provision, an adviserâ€™s compensation canâ€™t be based on a participantâ€™s selection of a particular investment option. The advice also must be based on generally accepted investment theories and consider the historical risks and returns of asset classes over time and the fees of any recommended investment. The adviser also should consider, if known, the participantâ€™s age, risk tolerance, retirement age, life expectancy, other investments and other sources of income.
The DOL proposal also requires an annual independent audit confirming the adviserâ€™s relationship with the plan is in compliance. In addition, before any advice is given, the adviser must provide written notice of certain information free of charge, including:
â€śDownward pressure on fees charged to participants remains a top priority for DC plan sponsors,â€ť says James Danaher, senior investment product manager in the DC solutions group at Northern Trust. â€śThey want participants to be able to track what they are paying without having to watch assets under management.â€ť
Comments on the proposals are due by May 5, 2010.