Securities and Exchange Commission Chair Mary Jo White’s March 29 speech to the Mutual Fund Directors’ Forum can be seen as a showcase of the philosophical differences between market regulators and banking supervisors. For directors, the speech also reveals the sometimes conflicting results of the compliance forces created by these two complementary regulatory systems.
While both watchdog agencies set rules, the SEC gives more emphasis than central banks to the role of board directors and trustees. For example, mutual fund boards are empowered to oversee their fund advisors, but the SEC also holds directors responsible for any shortcomings in performing that oversight. By contrast, the Federal Reserve and other central banks have, since the 2008 liquidity crisis, crafted an extensive array of constraints on bank holding companies, using very specific ratios to contain the leverage, liquidity and risk-taking of the banks under their supervision. The SEC tilts toward judgment, while the central bank leans toward specification.
BUT INFORMED JUDGMENT ASSUMES COMPARATIVE DATA ...
And that may be disappearing, along with the services being compared. It is yet another unintended adverse consequence of the new environment that fund directors are finding it harder not only to get the information that they need, but also harder for their funds to obtain the operating services they require. With more regulations and greater public disclosure, banks that provide fee-based services to fund customers are bearing higher costs from technology, while facing ever-growing threats from the class-action bar. It's no surprise that information with competitive value is today less often available in the public domain to funds and their consultants. At the same time, managers say that the overhead cost of service products is rising as “too-big-to-fail banks” struggle to downsize and then start to lose their economies of scale advantages.
Customers must pay the price, if the service is available at all. Add in the higher costs of the new capital regulations and that may well be the coup-de-gras for many services.
IS THIS THE END OF OPERATING SERVICES FROM BANKS?
In many cases, it appears that bank providers are abandoning certain parts of their service offerings altogether. For instance, the low-margin liquidity services that banks provide are disappearing as repo activity is curtailed by the new stable funding rules and securities lending services are threatened by the new indemnification costs. In turn, the custodial services which depend on these profit-centers will find their operations increasingly expensive to maintain at current fees. Performance measurement, fund accounting and shareholder recordkeeping services are also likely to feel the weight of the ax-man’s cuts.
It has always been difficult for funds to attract bids, even in a public solicitation, that compete with their fund advisor’s services. In the future, those services may not even exist.