SIFMA AMG Submits Comments to SEC about Asset Management Fund Stress-Testing Rulemaking

The Asset Management Group of SIFMA ("SIFMA AMG") submitted comments to the SEC regarding efforts to develop a stress-testing rule for management funds.

SIFMA AMG encouraged the SEC to create a rule that is principles based, with the underlying objective to complement other approaches to assessing investment risk, rather than a rule that merely tests for solvency or capital adequacy. In its comment letter, SIFMA AMG outlined several principles that the SEC should include in any stress-testing rule.

SIFMA AMG explained that stress testing cannot be the sole measurement of risk, and noted that such testing should be part of the overall process, which also should (i) consider stress material risk factors in order to determine potential vulnerabilities, given funds' risk factor exposures relative to the benchmark, (ii) include reverse stress tests to target the portfolios' most significant risks, and (iii) consider extraneous stress factors in order to uncover unintended risks or identify factors initially deemed as immaterial (i.e., emerging risks).

Additionally, SIFMA AMG suggested that a principles-based approach should:

• be designed to cover exposures that risk and investment teams consider to be most significant for a particular product;
• adapt to current markets and risk regimes;
• incorporate potential meaningful "shocks" to a portfolio;
• simulate behaviors that differ from current or "normal" market conditions; and
• periodically review and update risk inventory in order to address material risks associated with changing market conditions, world events and other factors.

Finally, SIFMA AMG stressed that the SEC should give "due consideration" to any potential conflicts of interest.

See: Comment Letter.