WEST PALM BEACH, FL (www.hedgeco.net) –
You no doubt heard that Paul Roye has announced his resignation as the Director of Investment Management at the SEC. This necessarily begs the question of who will succeed him.
The rumor mill is already working overtime on this one, with names of prominent in-house counsel at major fund groups and traditional 1940 Act law firms getting plenty of mention. What makes the appointment so interesting this time around is that this position has traditionally been a classic “revolving door” appointment. Paul Roye was absolutely typical, a former SEC staffer who went to Dechert, a firm that is an established “mutual fund law firm,” and now who will go back to a firm or a fund management company. (Rumor has it, in this regard, that it he may be going to the Capital Group in Los Angeles to rejoin his old Dechert partner, Paul Haaga). Of course, the Cap Group was recently charged by the NASD with making illegal incentive payments to brokers, so they could certainly use the help.
Most of the other logical candidates cannot possibly escape the taint of the fund scandals of the past year and a half. Most of the major mutual fund law firms represented both mutual funds and hedge funds, and knew or should have known about the late trading and market timing abuses. If the appearance of integrity is to be a criterion for the position, association with one of those law firms should be automatic grounds for elimination from consideration. This group includes the usual suspects from Dechert, Morgan Lewis, Kirkpatrick Lockhart, Wilmer Cutler, Sherman & Sterling, and several others. It is no coincidence that many of the lawyers in these firms are SEC alums, and that the SEC has never brought disciplinary proceedings against any of these attorneys or their firms for their role in fund abuses. What is even more curious, is the attitude of entitlement that the attorneys in the traditional mutual fund law firms have with respect to the Division Director position. The executive director of the ICI is a former Dechert partner and, no doubt, has already put the wheels in motion to influence the choice of Director.
Most of the in-house lawyers have been painted with the brush of responsibility for or involvement with the fund scandals, and should logically be ineligible for consideration as well. One name that has been tossed around is the General Counsel at T. Rowe Price. T. Rowe has escaped so far the fund scandals, but remember, this is the same T. Rowe Price that runs advertisements that compare investing with T. Rowe with batting practice. The advertisements state that 75% of T. Rowe funds beat their benchmark as the ball is being knocked out to the outfield every time. If a smaller fund company were to run this advertisement it would be shut down for engaging in false and misleading advertising.
The challenges that the new Division will face are significant and growing. The Division is responsible for regulating mutual funds, investment advisers, and now, hedge funds as well. Among the challenges that the SEC will face in filling this position will be to find someone with the requisite experience that is both broad enough and deep enough to bring effective leadership and vision to the position. The Division director will also need to be able to weigh the competing interests within the industry and not be susceptible to undue influence by the mutual fund’s primary lobbying organization, the Investment Company Institute.
Many of the potential candidates that would have been logical choices in a different regulatory environment may not survive the final cut. Among the names the industry has floated in this regard are Jack Murphy of Dechert, whose former Dechert partner Paul Scott Stevens, is now the Executive Director of the ICI, and Jay Baris of Kramer Levin. Industry wags have suggested that Matthew Chambers of Wilmer Cutler may be under consideration as well. Another prominent name is that of Jay Gould of White & Case LLP. However, Gould, a former SEC staffer with probably the broadest range of experience of most potential candidates, is based in California and would require the SEC to make a significant break with the revolving door tradition associated with this appointment.
Promoting someone from within the SEC would likewise seem to be an inadequate move. The staffers are so far removed from the reality of the industry, such an appointment would all but insure the continued ineffectiveness of the Division’s oversight of the fund industry.
So, who should Chairman Donaldson consider for this high profile position? First, the Chairman should turn a deaf ear to the ICI. Letting the ICI influence this appointment in even the smallest measure would be a huge disservice to the American investing public. Second, the Chairman should consider non-traditional candidates. People who have had some exposure to the industry, but are not completely soaking in it. After that, who knows, but the appointment will surely demonstrate whether the SEC is really serious about cleaning up the fund business, or whether the door continue to revolve.
