Regulatory reform is about to exact its price.
Whether it's capital surcharges for fund companies designated as "systemically important" or dealing with new fiduciary rules for advisors and brokers or the much-feared reform of money funds, the bill is about to come due-and get paid.
At a time when the overall inflation rate hovers around 2.2% a year, 36% of fund firm executives polled by Money Management Executive expect their organizations' spending on hardware, software, education, training, consulting, staff and other expenses associated with regulatory compliance to increase by more than 10% in 2013. Another 41% expect their firm's spending to increase between 6% and 10% and another 20% expect it to exceed 2%.
But it's not only in regulatory compliance where the impact will be felt. There will be a ripple effect on making sure that portfolio management and other operations follow through on and stick with establishment investment policies.
Thirty-three percent of executives polled expect to see spending on technology, training, staff and other expenses that go toward maintaining compliance with investment policies to increase by more than 10%. Another 36% put the increase at 6% to 10% and another 20% put it at more than 2%.
These are the findings of the 2012 Money Management Executive survey on the fund industry's regulatory outlook. In October and November, 158 chief executives, operating executives, compliance officers and other senior managers of mutual fund, exchange-traded fund and other industry funds responded to questions put to them by Lodestar Research of
The reforms that concern them the most may be surprising.
Topping the ranks?
Money fund reform? Nope.
Cost-basis accounting on fund shares? Not even close.
At the top of the list: the Securities and Exchange Commission's review of the use of derivatives by mutual funds and exchange-traded funds.
The federal regulator has initiated a review of such funds' use of futures, options, swaps and other derivatives, whose use has increased significantly in recent years.
The fund industry has contended that the use of derivatives gives its investors broader exposure to different types of investments, such as metals, agricultural products and other commodities, in addition to stocks and bonds. And, in turn, help limit investment risks.
Fully 45% of respondents listed the
Next up: dealing with efforts to align the fiduciary duties of advisors and brokers to the customers to which they sell shares in funds. That effort, still under way, is of concern to 44% of respondents.
Then comes the provision of the Dodd-Frank Wall Street Reform Act which will place a capital surcharge on mutual funds or other fund companies deemed by regulators to be "systemically important." That was cited by 42% of respondents, not all of whom belong to firms that could be considered, in the lingo of financial stability overseers, "systemically important financial institutions."
Then comes a flood of concern about money market mutual fund reform, which the industry thought the
The biggest concern, cited by 37%, is that regulators might allow or require the
Of the executives polled, 35% feared what systemic regulators might do; and, 27% still worried about the
And never going away is the concern that change is coming to marketing and distribution fees that funds can charge. These fees once were considered to help lower costs of funds by helping achieve scale, but have become vehicles for paying commissions. Critics charge the fees do nothing to actually enhance performance of a fund.
Whatever the pros and cons, 37% of respondents say they are concerned about the elimination or restructuring of such 12b-1 fees.
The amount of spending on regulatory compliance and investment compliance, while stepping up significantly, does not constitute staggering amounts, however. Only the very largest firms, those with 5,000 or more employees, expect to spend more than
The result is similar for investment compliance spending.
Only in this case, fully one-third of firms expect to spend under
The rise of reform and the need to manage it is seen at the highest levels of the executive suites, as well.
Almost two-thirds of respondents, 65%, indicated that their firms now employ a dedicated chief compliance officer. Another 36% have chief risk officers.
This is slightly lower, however, than last year's poll. In the 2011 survey, 67% of respondents indicate their firms had chief compliance officers – and 42% had chief risk officers.
Why does any of this matter?
Forty-five percent of respondents said because the outcomes affect their firms' bottom line performances. Another 38% said it affected their firms' ability to grow. And 36% said it affected their ability to innovate.
Fund Firms Not Getting Social
The returns are in.
Fund firms still do not 'like' social media.
Two-thirds of respondents-actually 68%-said they are either "not" or "not very" active in the biggest social network,
And that kind of disengagement is present across the social media spectrum. Seventy-six percent are not very active with
It gets worse, when it comes to marketing directly at customers. This, of course, can get tricky with regulators. Fund firms don't want to get stuck making promises about their products that they can't keep.
For marketing, 78% avoid
But maybe not for social media communications with and marketing to customers.
Here are some comments from respondents as to why:
Social media is social media. It's just basically getting education out there to our targeted audience. Do we put specifics of our products and strategies? No. Do we think it will make us money? No. It is just a channel you can't ignore.
The Business of
The time is fast approaching when advisors and brokers may not even meet their clients when they sell them shares.
Propsecti can be sent electronically. Explanations carried out by
What kind of complications might be in store? Or will this be a better way of doing business?
Here are some pros' responses:
Finding Fraud, Fighting Fraud
Fraud never goes away.
But how does any firm know that its funds are being used to launder ill-gotten gains or manipulate markets?
Here are approaches that top executives at top firms say they take, according to the 2012 Money Management Executive regulatory outlook survey.
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