9.21.2009 SEC Director Andrew Donohue, Director of the SEC’s Division of Investment Management, spoke at the IA Week/IA Watch’s 9th Annual IA Compliance Fall Conference regarding the challenges facing the investment adviser industry. Director Donohue identified and discussed these challenges:
- The Changing Investment Advisory Landscape
- The markets have become highly complex and intertwined;
- Certain strategies that were long considered the basis for sound investing began to fail;
- Actively managed funds have failed to outperform major market indices over long periods of time;
- Advisers have faced increased pressures to perform and alleviate clients’ legitimate concerns for the safety of their investments; and
- Advisers have faced further pressures as asset values declined and the advisory landscape adjusted to the new market environment.
- Sophisticated Products
- Investment advisers and their teams, as well as the legal and accounting groups, must truly understand the instrument and must ensure that they have implemented the proper legal, accounting and compliance techniques and controls.
- Many firms’ systems, particularly the compliance and accounting systems, may not be sophisticated enough to effectively handle synthetic instruments;
- Challenges of using derivative instruments in managing client portfolios:
- The potential impact of derivatives on a portfolio are not related to the amount invested in the derivatives;
- Derivatives can offset the benefits that a portfolio might be expected to derive from the quantitatively mandated requirements; and
- Derivatives frequently have implicit leverage that can result in technical compliance with limitations on explicit leverage but expose the portfolio to precisely some of the risks associated with leverage that clients sought to avoid.
- Advisers are also using increasingly complicated processes in their securities trading practices.
Director Donohue then addressed recent regulatory actions, stating, “this . . . [is] even more reason to be vigilant in your compliance programs to ensure your clients have confidence in those managing their money.” Donohue addressed the regulatory developments being proposed to address challenges in the industry, such as the adviser custody rule, the adviser pay-to-play proposal, and Rule 2a-7 amendments. He stated that in addition to these regulatory developments, his Division will likely make a recommendation to the SEC by year’s end on proposed rules to stabilize the money market funds and improving fund disclosures.
Click http://www.sec.gov/news/speech/2009/spch092109ajd.htm to access the speech.