SEC Director of Investment Management Reviews Developments in "Vital" Areas of Asset Management
SEC Director of the Division of Investment Management David Grim reviewed ongoing regulatory developments in: (i) exchange-traded funds ("ETFs"), (ii) disclosure and reporting in the regulatory framework, (iii) private fund advisers, and (iv) fund board oversight.
Exchange-Traded Funds. Director Grim outlined how ETFs "fit" into the current regulatory regime. The SEC has incorporated ETFs into several rules intended to address increasingly complex portfolios and operations of mutual funds and ETFs. The Reporting Modernization rulemaking proposed collecting more tailored data for ETFs. The SEC also recently proposed a rulemaking requiring mutual funds and ETFs to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. Further, the SEC proposed limiting the use of derivatives in registered funds. Director Grim discussed how the proposed rulemakings could affect certain alternative strategy ETFs. Finally, the Division of Trading and Markets issued a Research Note assessing the operation of the equity markets under the stressed conditions of August 24, 2015.
Disclosure and Reporting. Director Grim asserted that disclosure is one of the "safeguards" of both the Investment Company Act and Advisers Act to promote informed decision-making by investors. He stated that the amount of information available to investors about funds and advisers has "increased exponentially" since 1940. In response, the SEC proposed new reporting forms, N-PORT and N-CEN. The new forms help the SEC use collected data to better understand the industry and new products, he said.
Private Fund Advisers. New Form ADV information has provided the SEC with "a bigger and more complete picture" of "the business landscape of private fund advisers," stated Director Grim. In addition, Form PF has provided the SEC with "rich data about private funds." The SEC can now: (i) understand an adviser's business and investment strategy as part of its pre-examination evaluations, (ii) monitor investment strategies among private funds, and (iii) understand the potential effects of certain market and global events. Director Grim remarked that "this new area of increased transparency" should help address persistent questions, and to some degree, misconceptions, about the practices and size of the private fund industry.
The Role of Fund Boards. Director Grim stated that fund directors have "the critical job of oversight." He stated that the SEC is "focused on providing directors with the tools they need to effectively oversee funds" and has provided recently staff guidance on: (i) fund distribution and "sub-accounting" fees, and (ii) cyber-security. Further, Director Grim noted the recent SEC rule proposal designed to promote stronger and more effective liquidity risk management across open-end funds.
Commentary
While Director Grim's remarks do not necessarily convey any new news, they do highlight the Division of Investment Management's view that transparency and good governance are powerful solutions to the Division's current four "vital" areas, and that the Division is working successfully with the industry to improve the substance of rules in these four areas. However, some in the industry may question the Division's success, particularly as the proposed rules on liquidity management and disclosure, and the proposed limits on the use of derivatives, may lead to existential crises for certain liquid alternative ETFs and other traditional mutual funds. Similarly, while the Division's recent guidance on cybersecurity may indeed be helpful, it adds to a panoply of recommendations from around the government and industry that, until harmonized, may not lead to practical solutions to the cybersecurity threat. While some laudable efforts are being made, clearly there is more work to be done.