12.9.2009 Andrew J. Donohue, Director of the SEC’s Division of Investment Management, spoke at the Investment Company Institute (ICI) conference on risk management, the SEC’s accomplishments, and the Division’s “to do” list. Risk Management:

  • The question is not how to eliminate risk, which can never be achieved, but rather how to determine whether the risks a fund is taking are the right risks and whether those risks can be disclosed in a way that investors understand. For investors, first, can the investor take on the risk being considered? Second, what are the investor assets that are being invested needed for?
  • Target date funds try to address three types of risks that people preparing for retirement face: (1) investment risk—the risk that they might lose some or all of their retirement savings; (2) longevity risk—the risk that they might outlive their retirement resources; and (3) inflation risk—the risk that inflation devalues the resources they have for their retirement. Now, depending on how a particular investor values those risks, each investor may wind up with significantly different asset allocation strategies.
  • For funds, some things to think about regarding risk are: (1) whether you have correctly identified the risks to a fund and its shareholders; (2) whether you have eliminated or mitigated risks that are not appropriate for the fund; and (3) whether you have communicated the risks the fund has accepted to the fund’s investors in a manner they can understand and in a way that allows them to make an informed decision about investing in the fund. In regard to this last point, a never-ending list of “risks,” without any framework for an investor to understand and evaluate the risks, is not that helpful. To be truly meaningful to investors, a description of each risk should include some analysis as to the likelihood of the risk occurring and the consequences of the risk if it does occur.
  • While in general risks and returns are related, risk appears, at times, to be not properly identified and inadequately compensated for in potential return.

The Director spoke about the SEC’s accomplishments, including those related to money market funds, rulemaking under the Investment Advisers Act of 1940, director guidance, other rulemaking initiatives, the Division’s Chief Counsel’s Office, and disclosure review and exemptive applications.

Finally, the Director discussed upcoming initiatives, including Rule 12b-1 reform, investment adviser recordkeeping modernization, to codify and expand relief currently provided in exchange-traded fund (ETF) exemptive orders and to permit funds to invest in ETFs, and to consider re-proposed amendments to Form ADV Part 2 that would require advisers to deliver a narrative brochure to clients and prospective clients.

Click http://www.sec.gov/news/speech/2009/spch120909ajd.htm to access the speech.