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Roye Outlines Investment Management Division’s Agenda

By Jeanne Zurlo - Wed June 18, 2003 5:25 PM ET

Speaking at the National Association for Variable Annuities’ 2003 Regulatory Affairs Conference, Paul Roye, director of the SEC Division of Investment Management, said the Division would like to speed up its exemptive application processes by possibly codifying certain forms of relief that are frequently requested.

The Division is considering a rulemaking to permit insurance companies to substitute the underlying funds that support variable annuity and variable life insurance contracts. Currently, a Commission order under section 26(c) of the Investment Company Act is needed to make the substitutions. Roye said the Division has received an increasing number of applications requesting section 26(c) relief and would like to codify the applications into a new rule.

The Commission has also issued more than 100 exemptive orders permitting mixed and shared funding and would like to codify those orders into a rule as well. Such exemptive relief is currently needed if an underlying fund proposes to sell its shares to variable life insurance separate accounts. The Commission’s exemptive orders have imposed a set of conditions that include monitoring by the fund and the participating insurers for the existence of any conflict among the interests of various variable contract owners investing in the fund. Proponents of a rulemaking in this area have questioned whether the Division’s experience with mixed and shared funding warrants the concerns it has expressed about potential conflicts among investors.

It should be noted that Roye floated these same two potential rulemakings one year ago, so it is unlikely that a rulemaking is imminent.

The Division recently acted in the area of compliance. In February, the Division proposed new rules that would require investment companies and investment advisers to adopt compliance policies and procedures designed to prevent violations of the federal securities laws and require them to designate a chief compliance officer to administer the policies and procedures (Rel. No. IC-25925, February 5, 2003).

Roye noted that the proposed rules do not describe a specific set of policies and procedures that must be in place. Instead, funds would have the flexibility to tailor their own compliance policies and procedures to fit their structures. “What is important,” he said, “is that these policies and procedures be in place and that they be reasonably designed to lessen the likelihood of violations.”

Roye credited the lack of scandal in the investment company industry to the fact that many funds have compliance officers and effective compliance procedures already in place. He added, however, that the Division has gone into some investment company complexes and found no compliance controls in place at all. Many of the Division’s enforcement cases have in fact been the result of weak or nonexistent compliance controls.

Roye noted that the comment period for the compliance proposal closed on April 18 and that the Division is currently reviewing the comments received.

Another proposal drafted by the Division relates to shareholder reports (Rel. No. IC-25870, December 18, 2002). Released in December, the proposal would require mutual funds to disclose in their shareholder reports the amount of fund expenses borne by shareholders during the reporting period. The Division asked for alternative ways of releasing the fee information to shareholders and is currently reviewing the comments received.

Finally, Roye said the Division is moving forward on hedge funds. In May, the Commission hosted a two-day roundtable at which hedge funds were discussed. The Division is currently putting together a report from the roundtable, which Roye hopes to submit to the full Commission soon.


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