Sources: SEC Ponders Mutual Fund Self Regulation

January 28, 2003 ( - The US Securities and Exchange Commission (SEC) is expected to float a proposal to establish a self-regulatory body to oversee the US mutual fund and advisory firm industries.

According to SEC sources quoted by Dow Jones, “one or more” self-regulatory organizations would do routine examinations of the $6.5-trillion mutual fund industry and 7,500 federally registered investment advisers managing $19.7 trillion of assets. Also included will be 15,000 state-regulated advisers.

The agency is also expected to propose new rules that require mutual funds and investment advisers to bolster internal controls by adopting written policies and procedures to prevent securities-law violations. Funds and advisers would be required to take a look at their internal controls annually as well as appointing a chief compliance officer.

Funds and advisory firms aren’t subject to such requirements at present. The SEC proposal would formalize compliance systems at funds and advisory firms, putting them on par with brokerage companies.

Advocates of the approach said it will assist routine SEC examinations and inspections of mutual funds and advisory firms. The agency currently oversees thousands of mutual funds and advisers. Congress split oversight of the advisory industry in 1996 leaving the SEC to regulate those managing at least $25 million. Smaller advisory firms are regulated at the state level.The SEC’s proposed rule is expected to cover state and federally regulated investment advisers and mutual funds.

Along with the proposed rule, the SEC will seek comment on four alternatives to toughen oversight of funds and advisers.

Ideas being floated would require fidelity bond insurance, expanded reviews by independent auditors, or periodic inspections and compliance reviews by third-party firms.Opponents say a new layer of regulation for funds and advisers isn’t necessary because existing laws and regulations have kept the fund and advisory industry largely free from scandal.

Final adoption of the proposal requires a second SEC vote after a public comment period.