As reported in the Financial Times,  the US Securities and Exchange Commission is touting a new brain trust in response to an oft-cited criticism that its staffers do not have the necessary level of industry knowledge and experience to effectively regulate the business.

The SEC’s new asset management unit is part of a broader reorganisation at the agency designed to make it a more efficient and effective regulator. The unit will focus on investment advisers, investment companies, hedge funds and private equity funds.

The unit is being led by Bruce Karpati, who was assistant regional director for the SEC’s New York regional office, and Robert Kaplan, who was an assistant director of the SEC’s enforcement division. Prior to serving in the SEC both men worked as industry attorneys. The unit is planning to hire staffers from the industry and is continuing its recruiting efforts, the agency says.

The US fund industry has greeted the new structure with cautious optimism. Some experts say the change could help the SEC stay on top of an increasingly complex business that it has struggled to regulate. Others fear that the increased scrutiny could result in a SEC that overreacts and punishes violators for transgressions it missed in the past. Another concern is that funds will be ill-prepared to deal with the stepped-up oversight.

By staffing this unit with industry experts, asset managers hope for deeper analysis of complex issues, such as derivatives, which could result in speedier resolutions and greater co-operation to resolve problems that may otherwise draw harsh enforcement action.

“It’s fair to say people in the industry have been favourably impressed, but it remains to be seen how it plays out,” says Barry Barbash, the head of the asset management group at law firm Willkie Farr & Gallagher and a former SEC investment management division director. “It potentially cuts both ways because areas not reviewed all that much in the past are potentially subject to more scrutiny.”

The asset management unit is likely to result in faster conclusions to investigations, says Brian Rubin, partner with Sutherland Asbill & Brennan and a former senior counsel in the SEC enforcement division.

“I think the fund companies want their regulator to understand what their products are about and how they sell them, so a specialised unit will help in that regard,” Mr Rubin says. “And it should also bring investigations to a faster conclusion because the staff won’t need time to ramp up and get an understanding of the product.”

The asset management unit will also aid the SEC in tracking industry trends and regulatory issues more closely, which will allow it to initiate enforcement actions more quickly, he adds. He acknowledges that funds may encounter a drain on resources if they are not prepared for the increased scrutiny.

One of those areas that may face increased scrutiny is fund disclosure, according to Christian Thwaites, president and chief executive at Sentinel Investments.

Funds recently witnessed this with the SEC’s review of target date funds. The SEC examined whether or not investors were aware that the dates included in the funds’ names did not correspond to the funds’ glide paths. And just as the focal point of attention with target date funds was disclosure, funds can expect increased disclosure to drive future probes, Mr Thwaites says.

Other areas the SEC may focus on include shedding more disclosure on trading practices, fund expenses and exchange traded funds, says Mr Thwaites. The agency is already examining funds’ use of derivatives, an area primed for greater disclosure and possibly substantive regulation, says Russ Morgan, chief compliance officer at Sentinel.

Mr Thwaites welcomes a “more activist” SEC, but also warns that going too far may result in a giant oligopoly fund industry.

“One big risk in any of this is it forces more and more players in the mutual fund industry to exit either because they can’t keep ahead of compliance costs or they don’t have the resources to respond,” he says.

The industry can take some credit for inspiring a reinvention at the SEC, says David Hearth, partner with law firm Paul Hastings. In recently hiring its first chief compliance officer, Kathleen Griffin, former senior compliance manager and deputy code of ethics officer for Putnam, the SEC probably examined the industry’s best practices in developing its own compliance infrastructure, he says. “The regulator has adopted what was required of the regulated,” he says.

Mr Hearth also praises SEC efforts to staff their ranks with industry experts. But having a respected think-tank that inspires measured regulatory actions does not make the SEC immune to political pressure, he says. The SEC may find itself acting quickly on future, high-profile scandals without appreciating the long-term ramifications of its actions, he says.

“The hope is that it is more efficient because [they] understand the issues better,” Mr Hearth says. “You hope they make better judgments about what is the real problem.”