SEC Investment Management Director Provides Updates on Liquidity Risk, Cyber Security and Material Risk Disclosure

Director of the SEC Division of Investment Management ("Division") David W. Grim gave an update on the liquidity risk management proposal, cyber security risk reporting proposal and recent guidance on material risk disclosure at the Investment Company Institute’s 2016 Mutual Funds and Investment Management Conference.

With respect to pending SEC rulemaking, Director Grim addressed the various open items from the past year. On the SEC’s liquidity risk management proposal, he highlighted concerns regarding proper liquidity-risk oversight for open-ended funds and swing pricing, adding that alternative solutions are being reviewed which may include changes to the liquidity classification framework and the three-day minimum liquidity requirement. Speaking on recent events, Director Grim focused on the winding down of Third Avenue Management’s Focused Credit Fund. He noted that this development has highlighted critical issues of illiquidity concentrations by open-end funds and underscored the importance of the SEC’s liquidity risk proposal, which would require open-ended funds to conduct a standardized review of liquidity risk and adopt written programs and protocols for such risk management, with an eye to objective oversight.

Director Grim also spoke about the SEC’s proposal to update the reporting framework for investment advisers and investment companies and noted that the Division is particularly concerned with cyber security as the industry continues to evolve. The SEC is implementing cyber security protocols recommended by the National Institute of Standards and Technology and has requested funds from Congress to maintain and bolster its cyber capabilities.

With respect to risk disclosure, Director Grim addressed the Division’s most recent guidance updated, intended to help funds provide robust risk disclosures in evolving market conditions. The guidance emphasized routine monitoring of market conditions and recommendations that funds should determine whether market developments present material concerns to investors and make disclosures accordingly. Additionally, the guidance recommended less formal methods of disclosures, such as website updates or sending letters to shareholders.