Rep. Spencer Bachus Criticizes SEC for Being 'Flawed and Inefficient'

US Representative Spencer Bachus has said he is planning legislation to restructure the U.S. Securities and Exchange Commission in order to implement changes recommended by the agency’s inspector general, the Government Accountability Office and a consultant’s report mandated by the Dodd-Frank Act.

(August 3, 2011) — House Financial Services Committee Chairman Spencer Bachus (R-Alabama) says that simply providing more funding to the Securities and Exchange Commission (SEC) will do nothing to solve the regulator’s inefficiencies and structural failures.

“The SEC is structurally flawed and suffers from operational inefficiencies and organizational incoherence,” said Bachus in a release. The legislation, to be called the SEC Modernization Act, “will be a comprehensive restructuring of the SEC. It will make the SEC more efficient, consolidate duplicative offices, enable the agency to use better technology, and strengthen ethical safeguards to avoid conflicts of interest.”

The legislation would shut down the Office of Compliance, Inspections and Examinations and move its duties under the Division of Trading and Markets and Division of Investment Management. Additionally, it would divide the Division of Risk, Strategy and Innovation, re-assigning that role to separate offices inside the other four divisions.

He continued: “Simply providing yet more funding to the SEC without first correcting its flaws will do nothing but prolong these inefficiencies and structural failures,” he said. “Without fundamental reform, there will never be any real improvement to the SEC’s operations.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Bachus’ legislation will also impose reforms recommended by the SEC’s Inspector General, the Government Accountability Office and a Boston Consulting Group report mandated by the Dodd-Frank Act. According to the congressman, the SEC’s budget this year is at $1.185 billion, up 6% over 2010—and nearly triple what it was a decade ago.

The SEC has been widely criticized for not enforcing greater oversight after the 2008 financial crisis and, since then, it has upped its efforts.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

According to Cambridge Associates, investors may want to move away from the traditional approach of allocating primarily to long-only equities, with just a modest allocation to other strategies like real estate and private equity.

(August 3, 2011) — Pension funds must focus on asset-liability risk to mitigate the likelihood of another perfect storm, a report by Cambridge Associates asserts.

“The last perfect storms were 2001-2003 and 2007-2009,” report author David Druley, a Managing Director at Cambridge Associates, told aiCIO. During those periods, interest rates decreased causing liabilities to spike, coinciding with drops in equities.

Consequently, pensions are increasing their allocations to fixed-income to hedge against declining interest rates. “The hedging portfolio is the primary area of focus for many pension funds that implement liability-driven investment strategies,” said Druley. “This approach actually only allows for a portion of the total risk reduction that could be achieved by using a total-portfolio risk-budgeting framework. For one thing, ‘de-risking’ by primarily increasing the allocation to the hedging portfolio unnecessarily reduces long-term expected returns,” he said.

The report asserts that investors should focus more on asset classes that aren’t fully exposed to equity markets. For instance, an institution could create a long-short equity program that has only 30% exposure to the equity markets but still has attractive return potential if the managers are adding significant value through active management.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“To implement this strategy, you need to use active management, and the most talented active managers are in the hedge fund space,” Druley told aiCIO, adding that while he believes there are some areas where it’s harder to add value through active management, there are robust opportunities to add value to plans and reduce risk through the use of active management. “With regards to active versus passive, investors must be selective,” he said.

Among the issues for pension funds that the report explores:

What a “smarter” growth portfolio might do.
What might comprise a “smarter” growth portfolio. Strategies for diversifying the growth portfolio across various betas and active exposures can include passive and active long-only equity strategies; long/short equity hedge funds; arbitrage-related hedge funds; excess return-oriented credit strategies; public and private real estate; natural resources investments; and private equity.
How to manage risk inherent in a “smarter” growth portfolio. A strategy that allocates a significant amount of risk to active exposures must extensively diversify sources of active risk

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742