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White Highlights New Initiatives in Asset Management Regulation

In a recent speech, SEC Chair Mary Jo White focused on the asset management industry, remarking that “[w]e are now embarking on a new period of regulatory change, driven by long-term trends in the industry and the lessons of the financial crisis.” She stated that “[i]t is not enough . . . to simply identify, monitor and evaluate,” and outlined three core initiatives that the SEC staff, at her direction, has been working on to address fund portfolio composition risks and operational risks.

White first addressed the need to enhance data reporting for investment advisers and funds.  Citing the fact that “reporting obligations have not, in my view, adequately kept pace with emerging products and strategies being used in the asset management industry,” she noted that the SEC staff is currently developing recommendations to enhance reporting due to current gaps in the areas of standardized reporting regarding fund use of derivatives, fund liquidity, and valuation of portfolio holdings, and securities lending practices.  In addition, she called for the collection of more information on separately managed accounts.

Second, White turned to the need for registered funds to have controls in place to identify and manage risks, particularly with regard to liquidity management and the use of derivatives. She noted that any rulemakings in these areas would be informed by information gathered by the Division of Investment Management and the National Exam Program. Specifically, the SEC staff is considering whether to require the use of “broad risk management programs” to address the risks related to the liquidity and use of derivatives by funds and ETFs and “measures to ensure the Commission’s comprehensive oversight of those programs.”  In addition to the broad program, the SEC staff also is exploring “updated liquidity standards, disclosures of liquidity risks, or measures to appropriately limit the leverage created by a fund’s use of derivatives.”

Lastly, the SEC staff is focusing on transition planning and stress testing, tailoring the recommendations to the asset management industry. She noted that the staff is developing a recommendation that would require investment advisers to create transition plans to prepare for major business disruptions.  White acknowledged that the risks presented for winding down an investment adviser are not the same as those for winding down other types of financial firms. However, she expressed concern that some investors could face restrictions on the ability to move assets, and argued that “a clear transition plan for that adviser could benefit investors and the market.” White also mentioned the staff’s work on developing stress testing requirements for large investment advisers and large funds, as required by Dodd-Frank. 

White also touched on the topic of systemic risk, and argued that the “renewed emphasis” on the topic “complements our long-standing mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” White noted that the asset management industry represents a significant portion of the broader financial system, and that any changes undertaken by the Commission carry with them the potential to affect the entire financial system. As a result, “[t]ruly tackling systemic risk in any area, obviously, demands a broader program than one agency can execute.” White pointed to the Financial Stability Oversight Council as “an important forum for studying and identifying systemic risks across different markets and market participants” and asserted that the work of the SEC and the work of the FSOC are complementary.