“Jack Bogle, Haystacks, and Putting the Interest of the Clients First”, Prepared Remarks Before the 2024 Conference on Emerging Trends in Asset Management

Thank you, Natasha. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.  

Jack Bogle, the father of index funds, once said: “Don’t look for the needle in the haystack. Just buy the haystack.”

Of course, he was talking about collective investment vehicles—when well-regulated, one of the great financial innovations. They provide everyday investors with diversification and lower costs than investing in individual stocks or bonds.

Today, registered investment advisers advise 57 million clients with respect to $129 trillion in assets.[1]

This conference focuses on emerging trends in asset management. Before I turn to thoughts on such trends, let me mention two things more broadly about our economy and finance.  

First, technology is transforming every corner of our economy. Technology is transforming finance through the marketing, packaging, and selling of products to the investing public. It’s transforming how finance is done—how the back-office operates, including how securities are bought and sold.

Second, the U.S. has long benefitted from robust competition between nonbanks and banks in our $110-plus trillion capital markets. In fact, each of the registered funds and private funds sectors surpasses the size of the banking sector. Further, U.S. debt capital markets facilitate 75 percent of debt financing of non-financial corporations. In Europe, the U.K., and Asia, only 12-29 percent is raised in capital markets.[2]

Now turning to trends in asset management, I will discuss registered funds, private funds, and separately managed accounts.

Registered Funds

Investment funds registered with the SEC have grown to more than $32 trillion.[3] This includes $6.5 trillion in money market funds as well as more than $26 trillion in other mutual funds, closed-end funds, and exchange-traded funds. This all compares to the $23 trillion banking sector.[4]

The first trend I will note is the significant growth in American households investing in this sector. More than half of American households, representing more than 115 million individual investors, own registered funds. When I started on Wall Street 45 years ago, household penetration was less than 6 percent.[5]

The second key trend relates to the steady climb of passive investment strategies, currently $12 trillion, versus actively managed funds, currently $14 trillion. Bogle would be impressed.

That said, concentration worried Bogle. In a 2018 op-ed, he said: “If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation. Public policy cannot ignore this growing dominance….”[6]

In the exchange-traded fund space, the largest three complexes manage nearly 75 percent of the more than $7 trillion in net assets.[7] As it relates to U.S. money market funds, the largest 10 complexes manage 80 percent[8] of the $6.5 trillion in net assets.

The trend toward passive investment strategies also raises questions about the role of index providers. Two years ago, we sought public input on whether index providers, as well as model portfolio providers and pricing services, may be acting as investment advisers in certain circumstances.[9] Staff is continuing to consider those comments.

 A third trend I want to touch upon is the relationship of registered funds to financial stability. In 2008 and 2020, we saw issues emanate from registered funds, particularly money market and open-end bond funds, putting everyday Americans at risk.

Open-end funds have potential liquidity mismatches—between investors’ ability to redeem daily on the one hand, and, on the other, funds’ securities holdings that may have lower liquidity.

In the 1940 Act, Congress gave the Commission authority—and over the years, we have adopted rules—to address liquidity and dilution risks. We did so through reforms of money market funds in 2010 and 2014 in response to the 2008 financial crisis. We did so again in 2023 in response to the 2020 market events.[10]

Further, the Commission has proposed amendments to enhance the liquidity risk management of open-end funds.[11] SEC staff also has been in discussions with bank regulators regarding collective investment funds, which are managed by bank trust departments or for certain tax-qualified retirement funds and are exempt from SEC oversight.[12]

Such collective investment funds are estimated to be $7 trillion, $5 trillion at the federal level and $2 trillion at the state bank level.[13] Rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, requirement for regular reporting on holdings to investors, or requirement for an independent board.

We know from history that financial fires can spread from regulatory gaps, including when regulations don’t treat like activities alike. Market participants may then seek to arbitrage such differences. Thus, in considering possible next steps, I’ve asked staff to consult with bank regulators on how to best mitigate for regulatory gaps between collective investment funds and open-end funds.  

Private Funds

Private fund advisers now manage more than $30 trillion[14] in gross assets. They play an important role in nearly every sector of the capital markets. On one side are the funds’ investors, such as retirement plans or endowments. Standing behind those entities are millions of investors like municipal workers, teachers, firefighters, professors, students, and more. On the other side are issuers raising capital from private funds, ranging from startups to late-stage companies.

The first trend I’d note is the sheer growth over many years of the private funds field. In aggregate, they grew more than 10 percent just in the last year.

Certain subsectors, though, are growing even faster. For instance, private credit has been growing “exponentially,” according to a recent International Monetary Fund (IMF) report.[15] The entire commercial banking sector in the U.S. has only $2.8 trillion in commercial and industrial loans.[16] The global private credit market has about $1.6 trillion, predominately in the U.S.[17]

The second trend is the significant leverage in this field. A May 2023 Federal Reserve Report noted that “hedge fund leverage remained elevated.”[18] The 2023 Financial Stability Oversight Council annual report said, “leverage is concentrated among a small number of large multi-strategy, relative value, and macro hedge funds.” The report went on to say that “25 funds accounted for 57 percent of hedge fund derivatives value and 51 percent of hedge fund borrowing in the first quarter of 2023.”[19]

Many hedge funds are receiving the vast majority of their repo financing in the non-centrally cleared market.[20]

In a study of non-centrally cleared bilateral repurchase agreement (repo) data collected in June 2022, the Office of Financial Research said that 74 percent of pilot volume was transacted at zero haircut.[21]

We adopted rules last year to enhance access to central clearing in the Treasury markets. These rules will help address some of the risk in the Treasury repo markets.[22]

The leverage and growth of private funds raises issues regarding financial stability. I have experienced this firsthand when, in 1998, Treasury Secretary Bob Rubin sent me to Greenwich, Connecticut, as Long-Term Capital Management (LTCM) was teetering.

It’s not lost on any of us how leverage can lead to instability. It turns out LTCM had approximately $1.2 trillion in derivatives and a $100-plus billion balance sheet backed by only $4-$5 billion of net asset value.

In the wake of the 2008 financial crisis, Congress understood that such funds could affect financial stability. Congress repealed the exception that most private fund advisers previously relied on to avoid registration with the SEC.[23] Congress also directed the SEC to collect information from private funds “as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the FSOC.”[24]

Given the significant growth and changes in this field, we recently updated Form PF with amendments that will improve visibility into private funds.[25]

We also finalized the Private Fund Adviser Rule to increase transparency to investors regarding fees, performance, and side letters.[26]

Separately Managed Accounts

When Bogle created the index fund, few everyday investors, other than those who may have been quite wealthy, had separately managed accounts. Today, there are more than 54 million separately managed accounts.[27] In the last 15 years, the number doubled. Much of this growth is represented by the rise of robo-advisers in the provision of investment advice.

Separately managed accounts now represent more than $49 trillion in assets,[28] up nearly 50 percent in the last five years.

Given the more than 50 million clients affected, a rule announced this morning regarding incident notifications is critical. Under the amended Regulation S-P, covered firms, including registered investment advisers, will be required to notify customers if their sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization.

Further, given the rise of robo-advising, we proposed a rule regarding the use of predictive analytics.

If the optimization function in the AI system is taking the interest of the platform into consideration as well as the interest of the customer, this can lead to conflicts of interest. When brokers or advisers act on those conflicts and optimize to place their interests ahead of their investors’ interests, investors may suffer financial harm.

We’ve received a lot of feedback from the public on this proposal. As we have done from time to time with other rules, I’ve asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal.

We also have gotten robust feedback on a rule proposal regarding investment advisers’ safeguarding of client assets.[29] Congress granted the SEC new authorities in 2010 in response to the financial crisis and Bernie Madoff’s frauds. In particular, Congress gave us authority to expand the advisers’ custody rule to apply to all assets, not just funds or securities.

Based upon the feedback, I’ve also asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal. 

Aggregate Statistics

Before I close, I would like to update you on some of the SEC’s work in publishing aggregate data with regard to the securities markets.

SEC staff yesterday began publishing a new report based on aggregated data filed by investment advisers on Form ADV. It provides key statistics on the investment advisory industry and shows trends over time. 

Last month, SEC staff began publishing the Registered Fund Statistics report, which aggregates data about the registered fund industry.[30] We recently added new data visualization pages on money market funds on our website, adding to our monthly publication of money market fund and private fund statistics, which we’ve done since 2014.

Further, I’ve asked staff to make recommendations about other areas where we might update periodically published aggregate market statistics, including from Form PF.

All of this is because of the hard work of the Division of Investment Management and Division of Economic and Risk and Analysis, as well as others across the SEC.

Conclusion

Another Bogle quote that’s applicable to today’s conference, no matter the trends of the day: “A fiduciary standard means, basically, put the interests of the client first. No excuses. Period.”[31]

I’d like to thank the Division of Investment Management for hosting this conference. I’m proud to work alongside my colleagues who are watching out for Americans looking to build their nest eggs.