With the Sept. 13 deadline on pay-to-play rules looming, mutual fund companies are in heated discussions with broker-dealers about getting access to customer information that they need to comply.
The rules require that mutual fund companies keep records of all government entities that invest in their funds through retirement plans and Section 529 college savings plans. The problem, however, is that the funds don't have access to the investors' names, because their data usually is subsumed in omnibus accounts held by broker-dealers, bank trust departments and record keepers.
The Investment Company Institute has been in talks with Securities and Exchange Commission officials since October, asking them to rethink the requirement, suggesting that the SEC instead allow fund companies merely to disclose which firms it has omnibus accounts through, said Tamara Salmon, senior associate counsel with the ICI.
But if the SEC refuses its request, the ICI plans to ask the Financial Industry Regulatory Authority Inc. to put pressure on broker-dealers to comply, she said.
“If the SEC doesn't give us relief on this, then it's incumbent on broker-dealers, financial intermediaries and bank trust departments to voluntarily give us this information,” Ms. Salmon said.
The purpose of the pay-to-play rules, which the SEC adopted last June, is to prohibit investment advisers from getting business from government officials by making political contributions. Although the fund industry has no problem with the prohibitions, it does take issue with the record-keeping requirements that the rule will force on firms.
Specifically, the SEC isn't just asking funds to keep records of government entities that invest in their funds through retirement plans or 529 plans. The SEC wants them to do this even if no political contributions have taken place, Ms. Salmon said.
“How can there be play if there is no pay?” she asked.
REQUESTING RELIEF
The ICI in March asked the SEC for no-action relief from the rule. In cases where political contributions have occurred, the ICI is requesting that firms be required only to keep records on what firms hold the omnibus accounts.
Kevin Callahan, an SEC spokesman, said that the commission hasn't made a decision on the matter yet.
In the meantime, fund companies are having heated conversations with broker-dealers about accessing the client records, fund attorneys said.
“Brokers are very protective of their customer lists,” said Edward L. Pittman, an attorney at Dechert LLP. “In some cases, I have seen comments from distributors saying, "We aren't going to give it to you.'”
Many broker-dealers are offering to provide the customer information for a fee, Ms. Salmon said.
“Or alternatively, they are saying, "We will give you a data dump of everything on our books and records,' which isn't going to do any good, because the funds can't tell who are government entities,” she said.
The ICI also has been in talks with Finra about “encouraging” broker-dealers to provide the needed information, but the regulator is waiting to see how the SEC comes down on the issue, Ms. Salmon said.
At this point, if the SEC doesn't grant relief, it will be very difficult for distributors to comply with the Sept. 13 deadline, she said.
“If we don't get relief, it will be a huge burden on all distributors of mutual funds, including the broker-dealers, because they are going to have to scrub their records and find retirement plan accounts, which they will have difficulty doing unless they are held directly at the broker-dealers, and not in omnibus accounts,” Ms. Salmon said.
DUE DILIGENCE
Another big question with which fund companies are wrestling is what kind of due diligence they will have to do if the funds have to get the client information, said Ki Hong, a partner at Skadden Arps Slate Meagher & Flom LLP.
For example, clients are concerned about what they will have to do to get the customer names, he said.
“Are they going to have to amend their agreements with the broker-dealers, which could be thousands of agreements?” Mr. Hong asked. “The $64,000 question is: What level of due diligence will be required to get that information?”
E-mail Jessica Toonkel at [email protected].
“BROKERS ARE VERY protective of their customer lists.”
Edward L. Pittman
Attorney
Dechert
