Paul Roye was appointed director of the Securities and Exchange Commission's investment management division in November 1998. Before becoming one of the nation's top securities cops overseeing money managers and the $7 trillion mutual fund industry, Mr. Roye was a partner in the Washington office of the law firm of Dechert, where he specialized in institutional investor law. He holds a J.D. from the University of Michigan Law School, Ann Arbor, and an A.B. degree from Dartmouth College, Hanover, N.H. Prior to joining Dechert in 1982, Mr. Roye was a staff attorney at the SEC's investment management division. He discussed his tenure at the SEC and accomplishments of the investment management division with Vineeta Anand.
Q When can we expect the SEC's report on "best" execution, and what can we expect it will recommend?
A I'm not sure there will be a public report. The Office of Compliance has been focused on best execution. In every exam that they do in the adviser area, best execution is a component of what they focus on because we think it is important to get into commission dollars, commission rates, soft dollars, those kinds of issues. We think it's important because the clients are bearing the cost of that. In the mutual fund context, for example, we've asked the fund directors to focus on best execution and to analyze that issue. There are companies and consultants out there who can help money managers and money management firms focus on best execution and there are disclosures that are required in form ADV about best execution and how you handle execution generally, how you allocate trades.
We have taken what we have learned from Office of Compliance, for example in the form ADV, and sharpened the focus of some of the disclosures. Because of our jawboning about the issue, we're seeing more advisers paying attention to it. They're recognizing that it's important and we think that's a good thing.
Q For years, the SEC has cracked down on soft dollars. Why did the SEC expand the safe harbor under Section 28(e) in January to include principal trades?
A We have a statutory scheme that provides that soft dollars can be appropriately used to supplement the money management function where the soft dollars are done for bona fide research services. The commission has been vigilant in monitoring the use of soft dollars consistent with the safe harbor in 28(e), and I don't think you're going to see any backing off of enforcement actions when soft dollars have been abused.
(In) the recent action taken in regard to 28(e) and riskless principal transactions, I think the step the commission took there made a lot of sense because where transactions are transparent enough - where you can see the transaction cost and you can see what the costs of executing are - that there's no reason why those shouldn't be subject to the same kind of treatment as a traditional agency-type transaction that is permitted under this section. They effectively are the same thing. In a riskless principal transaction there is somebody on both sides of the transaction. It's not a dealer selling out of inventory to a customer, so it seems to me a logical extension of 28(e) to embrace those kinds of transactions.
Q How did your earlier jobs prepare you for this job?
A I started my career here out of law school as a young SEC attorney. That was extremely useful because I had a sense of how the agency worked and how it operated. Also, I had the perspective of what it's like to be here and get things done and get things out. When I left here to go to private practice, I was able to apply what I learned here to the real world and how investment companies and investment advisers operated, how they developed compliance procedures, how they dealt with issues. All that has been useful in coming back here and trying to help the commission work through some of the challenges in the investment management area.
Q What has been your biggest accomplishment at the SEC?
A I don't know that they're my accomplishments. I can tell you what I'm proud of from the standpoint of commission actions in the investment management area since I've been here. The corporate governance initiatives were important; the after-tax proposals will be very useful and meaningful to investors once they start paying attention to the information and make use of it. Once we get the Investment Adviser Registration Depository system complete, that will be a great investor tool. There are lesser things - like the names rule, encouraging funds to use names that aren't misleading. When I first got here, we got the personal trading rules for portfolio managers nailed down, and those seem to be working fine. The fee study we did was an important effort and we laid out some ideas we can follow up on in the future.
Q Such as what?
A One of the recommendations we made in (the fee study) was, investors now have the information about fees in the prospectus, but we thought we could sharpen the impact of fees in shareholder reports that go out to investors periodically - how fees have reduced performance. That is something we are going to be studying as we look at ways to improve and simplify shareholder reports and make those more user-friendly.
Q Talking about performance, how does your investment portfolio look like these days? Any duds?
A Mine probably looks as bad as everyone else's. I think mutual funds are a great vehicle and I'm a long-term investor, so I'm just hanging in there with everyone else.
Q With the long hours you have to put in, do you have time for fun? What do you like to do off the job?
A I like sports. I watch football, basketball and baseball, but the problem is time and a lot of my time is spent working. The rest of my time is spent trying to keep my kids entertained - from Cub Scouts, to soccer games to birthday parties to playing games. My fun is in keeping them entertained.
Q You've been here now for almost four years. What's next?
A Right now I'm just trying to focus on what the chairman wants to get accomplished. It's a very exciting time. There's a lot going on, a lot of issues, and it's a challenge and a privilege to work with the quality staff we have here and Chairman Pitt. For the time being, I'm enjoying the challenge and the excitement of it all.
