MFDF Forum News Feed

ISS Charged for Failure to Safeguard Client Information

2013-05-23T17:30:50+00:00

The SEC has charged Institutional Shareholder Services Inc. (ISS) for failing to safeguard the confidential proxy voting information of clients participating in a number of significant proxy contests. According to the SEC, from 2007 through early 2012, an ISS employee provided information to a proxy solicitor concerning how more than 100 of ISS’ institutional shareholder advisory clients (i.e., institutional investment managers) were voting their proxy ballots. In exchange for vote information, the proxy solicitor gave the employee meals, expensive tickets to concerts and sporting events, and an airline ticket. The employee, who had access to all of ISS’ clients’ proxy voting information, gathered the information by logging into ISS’ voting website from home or work and used his personal email account to communicate voting information to the proxy solicitor.

This conduct does not appear to be isolated to one employee. The SEC order states that proxy solicitors cultivated relationships with several ISS account managers, often through free meals, even though: “(a) one of the most important roles of a proxy solicitor is to inform their clients how shareholders are voting their proxies, (b) during the relevant time period, there was virtually no legitimate business reason for ISS’ account managers to have relationships with proxy solicitors, and (c) all of ISS’ account managers had access to voting information that would be very helpful to proxy solicitors.”

ISS has settled the charges with the SEC. ISS will pay a $300,000 penalty and engage an independent compliance consultant to review its supervisory and compliance policies and procedures.

Proxy Vendors’ Influence Waning

2013-05-23T17:00:56+00:00

The influence of proxy vendors is waning, according to a Wall Street Journal article. Firms like Glass Lewis and ISS have been accused in the past of wielding too much influence over proxy votes. However, the recent JP Morgan vote on whether to split the roles of chairman and CEO failed even though the two largest vendors recommended that shareholders support the proposal. The proposal won only 32.2% of the vote. The WSJ reports that many investment firms are making their own decisions on proxy votes and using ISS and Glass Lewis as only one of their tools to help form decisions. Vanguard, for example, employs about a dozen analysts to research companies year-round and often discusses upcoming votes directly with companies. The article does note that smaller investors still often rely on proxy vendors because they lack the resources to devote to their own analysis.

Fund Groups Launch MMF Alternatives

2013-05-21T20:30:06+00:00

In advance of anticipated SEC rule changes that would require institutional money market funds to float their NAVs, some fund groups are launching ultra-short bond funds that could compete directly with money funds for corporate cash. These ultra-short bond funds are considered money market “like” funds -- following many of the same investment restrictions as 2a-7 money market funds but with some exceptions that could boost yield, such as allowing investments in securities with slightly longer maturities. These funds will compete directly with money market funds and may gain an advantage if and when institutions are unable to invest in money funds with a stable NAV.

Supreme Court to Hear Fidelity Whistleblower Case

2013-05-20T19:55:05+00:00

The Supreme Court agreed to consider whether the Sarbanes-Oxley Act whistleblower protections apply to private advisers that provide services to mutual funds. The case involves two former Fidelity employees who reported possible security law violations, including the alleged improper retention of $10 million in fees. Fidelity allegedly retaliated against the employees in a variety of ways, including giving poor reviews and, in one case, terminating employment. Fidelity is arguing that the Sarbanes-Oxley whistleblower protections do not apply to the corporation because it is a privately held company. However, the plaintiffs are arguing that the protections should be extended to employees of contractors working for public companies, like mutual funds.

Chairman Mary Jo White Testifies on the Hill

2013-05-17T18:30:02+00:00

SEC Chairman Mary Jo White testified in front of the House Financial Services Committee yesterday. In her testimony, the Chairman provided a summary of the agency’s current activities. With respect to the Division of Investment Management, she mentioned the staff’s current work on updating valuation guidance available to funds and their boards of directors. In addition she discussed the recently established Risk and Exam Office (REO) within the Division that is dedicated to risk analysis and examination of funds and investment advisers. Chairman White stated that the work of the REO is expected to inform the division’s regulatory initiatives. In addition, the REO is expect to improve the staff’s analytical capacity as they have the capabilities to conduct “rigorous quantitative and qualitative financial analysis of the investment management industry.” A webcast of the hearing and Chairman White’s full testimony is available here.

Moody’s Analysts Predict MMF Industry to Shrink

2013-05-14T18:00:30+00:00

Moody’s analysts are predicting that the money market fund reform proposal being considered by the SEC will cause some smaller providers to go out of business, according to Bloomberg. The proposal is reported to require institutional prime funds to float their NAV. Moody’s has found that this “would have a significant impact” on cash-management products available to investors, investor preferences and industry composition. This would “lead to a reshaping of the industry, as some funds close or consolidate, and some of the smaller money-market fund managers either exit the business or reassess their business models.” The Moody’s report is available for purchase here.

SEC Cost-Benefit Analysis Bill to be Considered by House

2013-05-14T16:30:29+00:00

The House of Representatives is expected to vote soon on legislation that would impose additional requirements on the SEC’s cost-benefit analysis process. The "SEC Regulatory Accountability Act" mandates that the SEC Office of the Chief Economist participate in any cost-benefit analysis and would require the SEC to review its existing regulations every 5 years to determine if they are outmoded, ineffective, insufficient or excessively burdensome. Additionally, the bill requires the SEC to conduct a post-adoption assessment of any “major” regulation to measure the economic impact of the regulation and the extent to which it has accomplished its stated purpose.

The House Financial Services Committee passed the bill last week and House Majority Leader Eric Cantor has said that it will be considered by the full House later this month. According to the Congressional Budget Office, enactment of the bill is expected to cost $23 million over five years and require the hiring of 20 additional staff.

The SEC has been under recent scrutiny for inadequate cost-benefit analysis. Most recently, the SEC's proposed proxy access rule was struck down in 2011 for failing to adequately assess the economic effects of the rule.

Retail and Non-Prime MMFs May Keep Stable NAV

2013-05-10T15:00:08+00:00

Details on the draft money market fund proposal being considered by the SEC are starting to emerge. News outlets are reporting that the proposal requires prime institutional funds to float their NAV, while retail and government funds could maintain a stable NAV. The proposal is estimated to affect about 35% of the money fund industry. Supporters of the change say that the reform could make prime funds less susceptible to runs because it reduces the incentive for investors to redeem early during a market crisis. However, there are many questions that such a proposal raises, including how the implementation will affect funds with both institutional and retail investors. It is also not clear yet how “institutional” and “retail” investors will be defined.

Luis Aguilar, thought to be the swing vote on the issue, has said he is likely to support the draft proposal although he said his position could change as details are finalized. He also said there is a reach chance that the SEC will issue the proposed rules next month. After the proposed rule is released, the public will have at least 60 days to comment on the proposal. After that the SEC would have to vote a second time to release a final rule.

NICSA Webinar: The Operations Implications of Investing in Alternative Investments

2013-05-09T19:45:32+00:00

On Thursday, May 16 at 2:00pm ET, NICSA will host a webinar titled: “The Operations Implications of Investing in Alternative Investments.” With the increasing role of non-traditional investments, both investors and fund sponsors are showing interest in alternative funds over traditional stocks and bonds. Learn more about the specifics surrounding alternative investments at this NICSA webinar event. Panelists representing BNY Mellon, PIMCO and E&Y will tackle the operations implications – among them valuation, transparency, compliance and taxation – of investing in these products.

This webinar is free to Forum members. For more information, or to register, please click here.

Karparti to Leave SEC to Become Prudential CCO

2013-05-09T18:00:13+00:00

Bruce Karparti is leaving his post as chief of the SEC Enforcement Division’s Asset Management Unit to become CCO for Prudential Investments. Mr. Karpati has served at the helm of the Asset Management Unit since its inception in January 2010, overseeing a staff of more than 75 attorneys, industry experts, and other professionals responsible for conducting investigations into investment advisers, investment companies, and private funds. In his new role he will lead compliance for Prudential’s registered investment advisory company and serve as CCO for the Prudential mutual funds.