On May 20, 2016, SEC Chair Mary Jo White delivered the keynote address, titled the “Future of Investment Company Regulation,” at the ICI’s 2016 General Meeting in which she highlighted several recent SEC rule proposals and their current status, including fund reporting modernization, liquidity risk management and derivatives regulation, addressed focus areas for potential future regulation, and discussed other key challenges for the fund industry. Chair White specifically mentioned disclosure effectiveness and oversight of ETFs as issues of interest to the SEC in connection with the “next steps in the evolution of regulation for the asset management industry,” in addition to discussing the use of technology and service providers as other emerging challenges. These issues and related initiatives noted by Chair White are summarized below:
Disclosure Effectiveness in the Fund Industry
- Chair White stated that she has directed staff in the SEC’s Division of Investment Management (IM) to undertake a disclosure effectiveness initiative to consider ways to improve the form, content, and delivery of funds’ disclosures.
- Chair White anticipates that the IM staff will focus on, among other things: (1) ways to leverage advances in technology to improve the presentation and delivery of disclosures; (2) ways to enhance disclosure about fund strategies, investments, risks and fees; (3) improvements to a fund’s fee table to facilitate investor understanding of the information it presents and whether the most helpful information is required; (4) how funds can present risks most effectively and whether the requirement that a fund disclose certain factors that materially affected the fund’s performance can be improved; and (5) whether all of the information in a prospectus or statement of additional information continues to be necessary or helpful to investors.
Although the IM staff’s disclosure initiative is intended to assist funds and their sponsors in preparing effective disclosure materials, Chair White reminded the industry that it is each fund’s ultimate responsibility to provide investors with the information that they need to make informed investment decisions. To this end, funds should: (1) continuously re-evaluate the purpose and value of all disclosure; (2) avoid boilerplate language; and (3) tailor disclosure as appropriate for each fund.
Oversight of ETFs
- Citing the May 2010 “flash crash” and the extreme market volatility on August 24, 2015, Chair White noted that the SEC staff has been focused on analyzing such events and “any broader implications they may have for how [the SEC] regulate[s] ETFs.”
- In particular, the SEC staff is evaluating a number of areas related to the operation of ETFs, including: (1) the role that authorized participants and market makers play in the operation and trading of ETFs and how much they impact the liquidity in the markets; (2) the interconnectedness of the prices of ETF shares and their portfolio holdings, and the impact on investors when the ETF’s arbitrage mechanism does not function efficiently; and (3) the sales practices of broker- dealers in the market and how investors understand and use ETFs.
- Notably, Chair White stated that “further regulatory steps beyond additional disclosures may be needed to address some of these issues” concerning ETFs.
Use of Technology and Service Providers
Chair White advised that funds:
- be adequately prepared to promptly and effectively respond to risks that may be triggered by service providers and a fund’s own use of technology, including implementing alternative and reliable means to satisfy the fund’s regulatory requirements; and
- consider the full range of cybersecurity risks and consider appropriate tools and procedures to prevent breaches, detect attacks, and limit harm.
In addition to the foregoing topics, Chair White identified fund governance, valuation, performance advertising and intermediary fee arrangements as other challenges that funds should continue to work to address.
The text of Chair White’s speech is available at: https://www.sec.gov/news/speech/white-speech-keynote- address-ici-052016.html.