Giving an important speech on Thursday, SEC Chair White outlined a potential major overhaul of the way the SEC intends to regulate risks at investment advisers. She said the program addresses the SEC’s “historic” mission as well as systemic risk. Noting close cooperation between the SEC and the FSOC, she described the most significant tools at the agency’s disposal as: “controls on conflicts of interest; a registration, reporting and disclosure regime; and controls on fund portfolio composition risks and operational risks.” The speech described a three-pronged set of proactive initiatives the staff is developing with respect to the risk controls.
Improved, expanded and updated data and information requirements. According to White, these may include more information on the use by funds of derivatives and securities lending (which lending, she noted, is done by about a quarter of all funds.) More information on liquidity and valuation of holdings may also be requested. She expects the enhanced reporting to apply to both funds and advisers and to include better information on industry developments and potential compliance issues. A particular area of focus, which RFG has expected for some time, is the collection of additional data concerning separately managed accounts. White said the data will “better inform examination priorities and the assessment of the risks associated with those accounts, which are a significant portion of the business of many investment advisers.”
Enhanced fund-level controls at registered funds. White noted that liquidity management and the use of derivatives in mutual funds and ETFs are two areas of focus which have the potential for systemic risk. Staff may recommend broad risk management programs.
Stress tests and plans to transition client assets when circumstances, including the departure of key personnel, warrant. The staff is developing recommendations to require advisers to create transition plans as a way of preparing for a major disruption in their business. The plans would address restrictions that prevent investors from moving and the de facto limitations imposed by illiquid assets and market conditions. Stress tests for large advisers and funds are also being developed.
In closing Chair White noted, “In all of these efforts, the details will matter a great deal and there is significant work to do before we have final rules in place. We will be looking to investors and market participants to provide us their views…”