Director Dalia Blass of the SEC's Division of Investment Management (the "Division") recently delivered the Keynote Address for the ICI 2018 Mutual Funds and Investment Management Conference.1 Director Blass discussed four main topics: (1) the role of data in the SEC's work, (2) the role of fund directors, (3) aspects of exchange-traded funds (ETFs), and (4) considerations related to index providers.

Data and the SEC

In her remarks, Director Blass discussed the importance of data in regulating over 20,000 registered funds and advisers. In that regard, the SEC uses an internal tool known as MAGIC, or the Monitoring and Analytics GUI for Investment Companies. MAGIC combines "performance, flow, holdings and other information," which, among other things, allows the SEC to compare a fund's portfolio to its strategy and to evaluate whether its holdings align with its investment restrictions.2 In particular, MAGIC allows the SEC to identify which funds may have exposure to certain asset classes, such as cryptocurrencies. In her remarks, Director Blass indicated that MAGIC is dynamic, allowing the SEC to incorporate new data sets, such as information collected from Form N-PORT, and adding machine learning capabilities.

Fund Board Outreach

Director Blass next discussed the SEC's "Board Outreach Initiative" and indicated that, over the last few months, Division staff have met with funds boards, independent directors, counsel to independent directors and funds, and independent auditors. She articulated certain findings from the initiative, including items of interest to shareholders, such as "fees and expenses, investment performance, the rigor of the investment process and the quality of services provided to the fund."3 Interestingly, directors have stressed the importance of respecting the line between oversight and management; in other words, "there is a difference between overseeing the work of experts and being asked to serve as experts."4 For these reasons, one priority of the Commission staff is to update valuation guidance to reflect the evolution of the markets and accounting standards.

ETFs

On the topic of ETFs, Director Blass highlighted that the ETF market exceeds $3.5 trillion, pursuant to more than 300 exemptive orders. On the hand, Director Blass cited the flexibility offered by the SEC's ability to issue exemptive relief, but contrasted this flexibility with the expense of obtaining such relief and uncertainty surrounding the guidance provided by these orders. In that regard, she stated that the Division is working on an ETF rule to deliver to the Commission. Director Blass further discussed the broad categories of investment vehicles captured by the common use of the term "ETF." She expressed concern that investors lack understanding of the "risks, investment strategies and investor protections among ETFs, commodity pools, and exchange-traded notes."5

Index Providers

Finally, Director Blass asked whether the time had come to revisit the status of certain index providers as investment advisers and particularly emphasized providers maintaining an index for only a single fund. She acknowledged the history of many indexes relying on the publisher's exclusion from the definition of "investment adviser," but Director Blass cautioned against the assumption that a provider's status is "based simply on its characterization as an index provider."6 To be clear, Director Blass stated: "We are not making that assumption."7

These remarks articulate certain Division priorities. Market participants and practitioners would be well served to review their substantive analysis related to these priorities, and, for market participants, to consider whether their compliance policies and procedures would be impacted.