SEC Commissioner Aguilar Gives FSOC Thumbs-Down on Mutual Funds, Discusses Cybersecurity and Reg. NMS (with Lofchie Comment)

SEC Commissioner Luis A. Aguilar delivered a speech discussing the main issues and debates surrounding the mutual fund industry, including the SEC's authority, equity market structure and cybersecurity threats.

According to Commissioner Aguilar, the SEC historically has taken a "proactive" role in the asset management industry; however, he stated, activities of the Financial Stability Oversight Council ("FSOC") and its research arm, the Office of Financial Research ("OFR"), have recently undercut the SEC's authority. Commissioner Aguilar outlined the history of the SEC's regulation, mentioning recent rulemakings, such as rules to enhance the custody practices of investment advisers and reforms to money market mutual funds, to highlight the SEC's expertise overseeing the mutual fund industry. Additionally, Commissioner Aguilar criticized the FSOC and OFR research of mutual funds, citing the inadequacies of the OFR's September 2013 study of the asset management industry. According to Commissioner Aguilar, the SEC "does not have input or influence into what FSOC or OFR says or does." He noted that a mechanism should be developed by which the entire SEC, not just the Chair or staff, could "provide meaningful input and coordinate with the leadership of FSOC and OFR."

Commissioner Aguilar also discussed the mutual funds and equity market structure, mentioning the debate surrounding the "maker-taker" pricing model. Commissioner Aguilar explained the pros and cons of the model, stating that the SEC needs to consider seriously whether the current equity market structure is working for all investors. He mentioned that one recent recommendation from a commenter would be to create a pilot program in which maker-taker rebates were temporarily prohibited for certain securities in order to allow the SEC and others to study the effects of the maker-taker model on order routing practices, transparency and other metrics.

Additionally, Commissioner Aguilar discussed increasing concerns regarding cyber-threats, stating that "mutual funds and their advisers are not immune to the ever-present threat of cyber-attacks." He stated that he expects SEC examiners to review whether asset managers have policies and procedures in place to prevent and detect cyber-attacks, and whether asset managers are properly safeguarding their systems against security threats.

Lofchie Comment: Criticism of the FSOC by the SEC is now bipartisan, as Democratic Commissioner Aguilar joins with Republican Commissioners Gallagher and Piwowar in challenging some of the fundamentals behind the organization. Commissioner Gallagher criticized structural elements of the FSOC, noting that it effectively transformed various agencies that represent both Democrats and Republicans into single-party agencies, since only the majority party is represented on FSOC. Commissioner Aguilar's criticism is even sharper. His remarks refer to the actual competency of the FSOC.There is a serious question as to whether FSOC's mandate is too broad, and its structure too political for it to be constructive in addressing market challenges. Form PF, largely the creation of the FSOC is a good example. Intended as a tool to gather information with regard to private funds in order to help answer questions as to financial leverage, Form PF is so badly drafted that the information will be useless, notwithstanding the fact that great amounts of money have been spent providing it.

See: Commissioner Aguilar's Speech.See also: Commissioner Gallagher's 2012 Speech with Regard to FSOC; Commissioner Piwowar's 2014 Remarks on FSOC.