Securities Regulation Daily Wrap Up, SEC NEWS AND SPEECHES—White urges teamwork in current, future fund regulatory initiatives, (May 20, 2016)

By Amy Leisinger, J.D.

In reviewing current and future asset management initiatives at the Investment Company Institute’s general meeting, SEC Chair Mary Jo White stressed the importance of both SEC’s and the industry’s responsibilities to ensure investor protection. While the Commission and its staff will continue to pursue enhancements to fund disclosure and portfolio obligations, she said, investment companies must continue to foster a culture that prioritizes responsibility and fairness and to ensure that products and strategies to meet investors’ needs.

Recent initiatives. Recently, the SEC has issued rules reforming regulation of money market fund operations and disclosures, and the staff is working to finalize recommendations for the rules proposed on modernized fund reporting, stronger liquidity risk management requirements, and funds’ derivatives use, White noted. The Financial Stability Oversight Council has updated its review of the potential systemic risks in certain asset management products and activities, and the Financial Stability Board is in the process analyzing similar issues, according to White. “[T]he spotlight on the asset management industry has been bright,” she explained, and that is likely to continue in the coming years, as the industry continues to evolve and the total assets held by funds continue to grow.

“Dynamic and robust regulation will also be needed that adapts and evolves to meet all of the current and future risks and challenges, while preserving the features that have served investors so well over more than seven decades,” according to the chair. However, she cautioned, it is just as important for industry participants do their jobs as fiduciaries and responsible market leaders. To that end, she said, industry comments on current initiatives and their numerous constructive suggestions have been helpful in the development of final regulations.

In developing and managing the portfolio of a mutual fund in a changing environment, the most important goal should be fulfillment of the legal responsibility to meet shareholder redemptions while minimizing the impact on remaining shareholders, and the SEC will ensure that this crucial work is done, White said.

Look toward the future. Going forward, she explained, the staff will be focused on developing recommendations for transition plans and annual stress testing for certain funds and investment advisers. In addition, the SEC will address issues concerning the form, content, and delivery of funds’ disclosures, including the fee table and other statements regarding mutual fund costs. However, she stressed, it is a fund’s ultimate responsibility to provide investors with all information necessary to make informed decisions, and each organization should regularly reevaluate its disclosures to determine what can be done to improve investor understanding of strategies, risks, and costs.

The staff also continues to focus on the implications of market events surrounding ETFs and how regulations should be modified to governing these products, White noted. We are looking closely at the connection between ETF share prices and portfolio holdings, she said, and the potential impact when and ETF arbitrage mechanism does not function properly. A hard look becomes increasingly necessary as the product landscape continues to diversify, according to White.

Further study of funds’ use of technology and third-party service providers will also be necessary, particularly in light NAV calculation failures seen last year, she explained. Funds need to be prepared to respond to risks of service providers and to implement alternative means to satisfy their obligations, she said. Relatedly, White urged investment companies and their advisers to consider the range of potential cybersecurity risks and to take steps to prevent data breaches, detect threats and attacks, and to limit harm.

The focus should always be on the best interests of investors, she concluded.

RegulatoryActivity: InvestmentAdvisers InvestmentCompanies SECNewsSpeeches