In her keynote address at the Investment Company Institute's 2018 Mutual Funds and Investment Management Conference on March 19, 2018, SEC Division of Investment Management Director Dalia Blass discussed the Division's use of data analysis, the status of the Division's Board Outreach Initiative and various issues relating to exchange-traded funds (ETFs) and index providers.
Among other things, Director Blass discussed the Division's analytical work and its resources. For instance, she discussed "Monitoring and Analytics GUI for Investment Companies" (referred to as "MAGIC"), a tool developed by the Analytics Office (formerly known as the Division's Risk and Examinations Office) to assist Division staff in organizing and evaluating data submitted in SEC filings, noting the tool's broad functionality. She stated that MAGIC would help the Division "to implement a risk-based approach to reviewing disclosure that will improve the effectiveness and efficiency of [its] work." She further noted that MAGIC is dynamic and able to be extended to incorporate data gathered from new forms such as Form N-PORT, and that its abilities can be built upon, including, for example, the Analytics Office's recent addition of machine learning capabilities to the tool.
Director Blass also provided an update on the Division's Board Outreach Initiative, stating that over the previous few months Division staff members had met with fund boards, independent board members and their counsel, and independent auditors to learn about the challenges board members face and to obtain feedback about how board members view their role. She stated that fund board members had emphasized the importance of board involvement in matters that are of the greatest of concern to fund shareholders--fees and expenses, performance, investment process, etc.--but also stressed the importance of maintaining a separation between oversight and management, such as with valuation and the review of affiliated transactions. Director Blass stated that, in light of these discussions, the Division staff is working on updating its valuation guidance with a goal of developing recommendations to help boards perform their valuation duties in a manner that recognizes "evolution in the markets and the standards for accounting, auditing and reporting." She also stated that the Division staff compiled a list of board responsibilities that "blur the line between oversight and management," adding that the staff did not want to add to such responsibilities in future policy decisions.
In addition, Director Blass noted that ETFs, which in the aggregate represent over $3.5 trillion in assets, currently operate under more than 300 individually issued exemptive orders. She stated that the current situation was not ideal, expressing regret that a uniform ETF rule proposed in 2008 was not adopted and noting both the expense to new entrants to the ETF marketplace of obtaining the necessary exemptive relief and other negative outcomes resulting from ETFs operating under long and non-uniform exemptive orders. Consequently, a uniform ETF rule is a high priority for the Division; Director Blass said that the staff is working to prepare such a proposal. Director Blass also noted that the term "ETF" is often used to describe other investment products, such as exchange-traded notes (ETNs) or commodity pools, that are not investment companies or even funds. She expressed concern that shareholders may not understand the differences in risks, strategies and investor protections applicable to these various products if the generic term "ETF" is used to describe them all and posed the question of whether a different approach should be used for exchange-traded product nomenclature.
Finally, Director Blass discussed the evolution of the market for index-based ETFs, noting that in the past most indices were broad and fairly well understood but that more recently funds have been developed to track a broad range of indices, including indices focusing on narrow strategies, indices with alternative weighting methods (e.g., "smart beta" indices), custom indices and indices from affiliated index providers. She asked whether it would make sense to revisit the status of certain index providers--which have historically relied on the "publisher's exclusion"-- as investment advisers, noting that "recent developments appear to have moved certain index providers away from what we might think of as publishers." Specifically, Director Blass questioned the status of a provider of an index that is maintained for only one fund, a provider that takes significant input from the fund's sponsor or board in creating an index and an index provider that is an affiliate of the fund's sponsor, and emphasized that the status of providers of broad-based indices that are widely used need not be revisited. She further expressed concern that a fund that tracks a custom or narrowly focused index may not have adequate disclosure of its investment strategy.
The transcript of Director Blass's remarks is available at: https://www.sec.gov/news/speech/speechblass-2018-03-19