In a December 11, 2014 speech, SEC Chair Mary Jo White described three initiatives that the SEC staff has been working on to address fund portfolio composition risks and operational risks. Similarly, the following week on December 18, 2014, the Financial Stability Oversight Council (FSOC) voted to issue a notice inviting public comment regarding various matters affecting the asset management industry, including liquidity and redemptions, leverage, operational risk and the failure of an asset manager.

The first SEC initiative discussed by Ms. White focuses on enhanced data reporting for investment advisers and funds. She stated that the SEC staff is developing recommendations to enhance reporting with respect to fund use of derivatives, fund liquidity and valuation of portfolio holdings and securities lending practices.

Second, Ms. White discussed the need for funds to have controls in place to identify and manage risks, including with regard to liquidity management and the use of derivatives. She stated that the SEC staff is considering whether broad risk management programs should be required for mutual funds and ETFs to address such risks.

The final initiative described by Ms. White would require investment advisers to create transition plans to prepare for major business disruptions. Ms. White also noted that the SEC staff is considering ways to implement the new requirements for annual stress testing by large investment advisers and funds as required by the Dodd-Frank Act.

Ms. White also discussed systemic risk, noting that any changes undertaken by the SEC may affect the entire financial system, and stating that the work of FSOC and the SEC in this area is complementary. The following week, FSOC issued a notice requesting comments on systemic risks posed by products and activities in the asset management industry. FSOC acknowledged the SEC’s initiatives as outlined by Ms. White.

The FSOC notice requests comments on the following issues:

  • The extent to which redemption rights and risks in pooled investment vehicles could influence investor behavior and affect the stability of the financial system;
  • The ways in which the use of leverage by investment vehicles could increase the potential for forced asset sales, or expose lenders or other counterparties to losses or unanticipated market risks, and the extent to which these risks may have implications for U.S. financial stability;
  • Operational risks in the asset management industry, including those associated with the transfer of client assets between asset managers and risks that may arise when multiple asset managers rely on one or a limited number of third parties to provide important services, such as asset pricing and valuation or portfolio risk management; and
  • The effect the failure or closure of an asset manager, investment vehicle or an affiliate might have on the financial markets or the economy.

The full text of Ms. White’s remarks are available at www.sec.gov/News/Speech/Detail/ Speech/1370543677722#.VLRPRYrF-IJ.

The FSOC notice is available at www.treasury.gov/initiatives/fsoc/rulemaking/Documents/Notice%20 Seeking%20Comment%20on%20Asset%20Management%20Products%20and%20Activities.pdf.