[14262]
December 20, 2001
TO: COMPLIANCE ADVISORY COMMITTEE No. 68-01
SEC RULES MEMBERS No. 83-01
SMALL FUNDS MEMBERS No. 37-01
RE: SEC SPEECHES AT 2001 SECURITIES LAW DEVELOPMENTS CONFERENCE
Paul F. Roye, Director of the SEC’s Division of Investment Management, delivered the
keynote address at the Institute’s 2001 Securities Law Developments Conference. Stephen M.
Cutler, Director of the SEC’s Division of Enforcement, spoke at the conference luncheon.
Copies of their speeches are attached, and they are summarized below.
Paul Roye’s Remarks
In his speech, Mr. Roye stated the fund industry has been going through “a remarkable
period of change,” spurred by the market downturn, the tragic events of September 11th,
continued consolidation within the fund industry, and the appointment of a new SEC chairman.
To illustrate Chairman Pitt’s desire to “bring securities regulation into the 21st Century,” Mr.
Roye highlighted the SEC’s proposed amendments to Rule 17a-8, which would significantly
expand the rule to allow mergers of funds affiliated for any reason, as well as facilitate mergers
of bank common trust funds and collective trust funds into registered investment companies.
On the topic of technology and new products, Mr. Roye stated that “the Commission
staff will not stand in the way of innovation, as long as investor protections are not
compromised.” He noted that the Commission accelerated the effectiveness of an “electronic-
only” variable annuity – the first product of its kind – that will deliver all of its documentation,
including prospectuses, proxy statements and transaction confirmations electronically, without
a paper backup. He also stated that “the Commission is currently reviewing whether its
guidance regarding electronic delivery of information under the federal securities laws should
be modified.” Mr. Roye further noted that the Commission recently issued a concept release
seeking industry input on actively managed exchange-traded funds so that they can evaluate
these proposed products with the benefit of the industry’s perspective and experience.
Mr. Roye provided assurance that the Commission views itself as a service agency, and
that the Division of Investment Management is committed to helping the industry. He noted
that “one of the industry’s biggest complaints is that it takes too long to get exemptive
applications and no-action letters through the regulatory pipeline.” He indicated that the
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Commission will now be able to act with more flexibility in these areas and rely on the “sound
judgment of independent directors, now that the Commission has acted to enhance the
independence and effectiveness of directors.” He encouraged the industry to assist the staff in
expediting these processes by providing the Division with requests that identify and thoroughly
address all issues.
In the aftermath of September 11th, Mr. Roye stressed the importance of contingency
planning, and warned funds to expect inspections staff to look at contingency plans and ask
questions about alternative physical facilities, back-up records storage, and back-up
communications systems, as well as the extent to which funds test and evaluate contingency
preparedness. He also encouraged funds to “reassess their fair valuation procedures in light of
the events of September 11th,” to ensure that they can continue to appropriately value securities
in the wake of any disaster.
Stephen Cutler’s Remarks
In his address, Mr. Cutler first summarized several recent Commission enforcement
actions, highlighting the lessons to be gained regarding the duty to supervise, namely: (i) a firm
can outgrow its supervisory procedures; (ii) market conditions and the market environment
must be considered when evaluating supervisory procedures; (iii) good supervision requires
functional separation so that the person conducting the business function is not the sole person
responsible for supervision of that function; and (iv) supervision does not necessarily stop at
organizational boundaries. Noting in particular that advisors are responsible for the actions of
their subadvisers, Mr. Cutler provided some policies and procedures advisers should consider
adopting to supervise a subadviser, including the following: (a) obtain annual certifications of
compliance from employees of the subadviser; (b) conduct periodic meetings with compliance
personal at the subadviser; (c) require the subadviser to provide notice of regulatory
examinations and copies of any exam reports, and implement procedures to follow-up on any
troubling findings in the reports; and (d) periodically reassess supervisory procedures
applicable to the subadviser.
Mr. Cutler also focused on Chairman Pitt’s introduction of a “real-time” enforcement
program. He explained that the program seeks to respond quickly, effectively, and efficiently to
wrongdoing, and will consist of taking actions to stop fraud or other investor harm
expeditiously, bringing cases in pieces, and obtaining TROs and orders freezing assets. He
further noted that the program will reward meaningful cooperation “because doing so will
enable [the Commission] to bring more cases faster.” Mr. Cutler emphasized that this does not
mean that the Commission will be less than vigorous in enforcing the securities laws or “enable
any issuer to violate the law without repercussions, so long as after the fact the company self-
reports.” He further stressed that self-reporting is not the only prerequisite for the Commission
to extend credit for cooperation – the Commission “will look to the company’s actions both
before an after discovery of misconduct, including the rigor of its compliance and/or internal
audit program and the tone set by senior management.”
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In conclusion, Mr. Cutler summarized his message as “hope for the best, but plan for the
worst.” He noted that the “mutual fund community has a long history of good supervision as
well as cooperation in the broad sense of that term” and encouraged the industry to continue
“to build on and nurture that reputation.”
Doretha VanSlyke Zornada
Associate Counsel
Attachments
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website (http://members.ici.org) and search for memo 14262, or call the ICI Library at (202) 326-8304 and request the
attachments for memo 14262.
Attachment no. 1 (in .pdf format)