Financial Regulatory Forum

ANALYSIS-New U.S. funds regulator at SEC must shed Goldman skin

By Reuters Staff
January 20, 2011

The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg (UNITED STATES BUSINESS POLITICS)By Ross Kerber and Sarah N. Lynch

BOSTON/WASHINGTON, Jan 19 (Reuters) – For U.S. Securities and Exchange Commission Chairman Mary Schapiro, the choice of a Goldman Sachs Group  insider as her new top funds regulator could be a double-edged sword.

Eileen Rominger will have to prove she can be a neutral regulator of the industry from which she came. She spent the past 11 years at Goldman Sachs, most recently as chief investment officer of Goldman’s asset management unit before announcing her retirement in September.

On the other hand, Rominger, 56, will give the agency some of the Wall Street experience it has been accused of lacking in its oversight of complex instruments sold to small-scale investors.

Rominger’s new job as head of the SEC’s division of investment management — announced late on Tuesday — will give her wide influence over new rules and policies now under study at the agency, such as how to treat money-market funds following the financial crisis that pushed many to the brink.

The SEC is also gearing up to release a study on Friday that will lay the groundwork for future rules regulating brokers who offer investment advice to retail customers and whether they should be held to a higher standard.

Rominger is the latest Goldman Sachs alumnus to join the federal regulator ranks. Commodity Futures Trading Commission Chairman Gary Gensler and New York Federal Reserve President William Dudley are also former Goldman executives, as is former Treasury Secretary Henry Paulson.

The company’s close ties with Washington have often raised political questions about its policy role. Under government ethics rules, Rominger will have to recuse herself from all matters pertaining specifically to Goldman Sachs for a year. After that, she will have to recuse herself only if she or a close family member has an immediate financial interest in the company.

SHIFTING FOCUS

Unlike other recent heads of the SEC’s investment management division, Rominger is not an attorney.

Still her appointment drew praise from fund industry trade groups eyeing the deluge of studies and rulemakings required by the Dodd-Frank financial reforms.

Those studies and rulemakings mean that Rominger won’t have much chance to set her own agenda at first, said Barry Barbash, a Willkie Farr attorney who frequently works on fund industry issues. But they also will require a leader well-versed in the many arcane corners of the financial sector.

“To me this appointment is designed to put the division of Investment Management in a position where the person at the top has deep knowledge and expertise, Barbash said.

Rominger’s predecessor, Andrew “Buddy” Donohue, also came from the financial industry but often took positions at odds with company positions, such as backing new rules that would cost fund companies hundreds of millions of dollars of distribution fees.

Now Rominger will herself face questions of being too close to the funds industry and will have to show she can handle being on the other side of the table, several academics said.

“Whether she can abandon the cultural mind-set of industry and adopt that of a tenacious watchdog remains to be seen,” said Lyman Johnson, who teaches fund regulation at Washington and Lee University School of Law in Lexington, Virginia.

Former SEC Chairman Harvey Pitt said industry frequently poaches the expertise of former regulators and that it makes sense for the SEC to do the reverse.

“The SEC has an abundance of fine and talented lawyers. It has few, if any, experienced portfolio managers,” said Pitt, who now heads consulting firm Kalorama Partners.

The SEC has hired others from the private sector in recent months. Examples include a new algorithm expert hired for the SEC’s enforcement division as well as a former portfolio manager from Janus Capital Group.

“We seek proven leaders with the right combination of experience, expertise and commitment to fulfill our investor protection mission,” SEC spokesman John Nester said Wednesday.

The fund industry is led by closely held companies like Fidelity Investments and Vanguard Group Inc, plus publicly traded ones like Legg Mason Inc and T Rowe Price Group.

All are members of trade group the Investment Company Institute, which praised the pick of Rominger. “As a seasoned investment professional, she brings unique credentials to the commission staff, as well as the benefit of long and distinguished experience in the asset management business,” the ICI said.

(Editing by Karey Wutkowski and Steve Orlofsky) ((Ross.Kerber@ThomsonReuters.com; +1-617-856-4341; Ross.Kerber.Reuters.com@Reuters.net)) Keywords: FUNDS/REGULATOR

Wednesday, 19 January 2011 15:17:25RTRS [nN19203571] {C}ENDS

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