SEC Chair White Discusses Risk and Regulation in Asset Management Industry (with Lofchie Comment)

At the New York Times Dealbook Opportunities for Tomorrow Conference, SEC Chair Mary Jo White discussed the regulation of the asset management industry.

According to Chair White, the asset management industry has grown significantly and is becoming a vital part of the U.S. economy. It creates new products and investment strategies to meet the demands of its "increasingly diverse population of investors."

To regulate asset management, Chair White stated, three of the most significant tools provided by the Investment Company Act and Advisers Act must be used. They are as follows: (i) controls on conflicts of interest, (ii) a registration, reporting and disclosure regime, and (iii) controls on fund portfolio composition risks and operational risks. Chair White focused on the last of these tools, stating that a broader set of proactive initiatives is required to ensure that the SEC regulatory program addresses the "increasingly complex portfolio composition and operations of today's asset management industry." Chair White stated that these initiatives include:

• enhancing data reporting so that it keeps pace with emerging products and strategies being used in the asset management industry. Chair White explained that the SEC staff is developing recommendations for modernizing and enhancing data reporting for both funds and advisers;
• enhancing controls on risks related to portfolio composition to ensure that registered funds have controls in place to identify and manage the risks of their current portfolios effectively. She explained that the SEC staff is considering whether broad risk management programs should be required for mutual funds and ETFs to address risks related to their liquidity and derivatives use, as well as options for specific requirements, such as updated liquidity standards and disclosures of liquidity risks; and
• improving transition planning and stress testing. Chair White explained that the staff is developing a recommendation to require investment advisers to create transition plans to prepare for major disruptions in their business, and is also considering ways to implement the new requirements for annual stress testing by large investment advisers and funds, as is required by Dodd-Frank.

Lofchie Comment: Chair White's remarks appear to indicate that major rulemakings are in the works.

See: Chair White's Speech.