Fund of Funds Proposal: The SEC’s Plans to Streamline Fund Approval
Written by Jasmin Sethi for SCA client, Morningstar.
The SEC has released a proposal that would streamline approval of funds of funds. This proposal would have a significant impact on individual investors who are saving for retirement, as many target-date funds are funds of funds and their assets have played a larger role in the defined-contribution system over the past few years.
In fact, Morningstar’s Target-Date Fund Landscape report shows that in 2018, target-date mutual fund assets surpassed $1 trillion and garnered an all-time high of $55 billion in estimated net flows. This is on par with target-date mutual funds’ past performance, which has included more than $40 billion in net flows each year since 2008. This growth indicates the potential extent of the impact of the SEC’s proposed rules.
Here, we share our perspective on the opportunities and risks of the proposal.
How the SEC’s funds of funds proposal could benefit investors
We support streamlining the process for approval of funds of funds. The SEC proposes creating one regime to govern fund of funds, regardless of the fund type (open-end mutual funds, exchange-traded funds, business-development companies, closed-end funds). This would standardize the regulatory landscape for these funds instead of having a slew of no-action letters, exemptive relief, and other guidance governing individual fund complexes.
We believe this SEC-proposed rule is a wonderful opportunity for the Commission to introduce more simplicity and standardization to the fund world in the way that last year’s ETF rule did.
