Division Director David Grim addressed the ICI on December 16, 2015. In his remarks, Grim noted 2015 was the 75th anniversary of the 1940 Acts. He noted that the Division has recently proposed (i) enhanced regulation of the use of derivatives by registered funds, (ii) required implementation of liquidity risk management programs and enhanced liquidity disclosure by ETFs, (iii) and enhanced data collection for all registered funds.
Proposed Rule 18f-4
Director Grim noted that derivatives regulation at present is founded on Release 10666 dating to 1979 (and which strictly speaking addressed forward commitments, when issued securities and reverse repurchase agreements). He noted that in 2011, the SEC published a concept release, and that DERA has studied registered fund usage of derivatives. Proposed new Rule 18f-4 (http://www.sec.gov/rules/proposed/2015/ic-31933.pdf) would permit a fund to use derivatives if (i) leverage is limited, (ii) the fund holds qualifying coverage assets, and (iii) any fund with 50-percent derivatives exposure or that uses complex derivatives adopts a formalized risk management program.
Formal SEC guidance on liquidity risk management by open-end funds dates to 1992 amendments to Form N-1A. (Note that DERA’s September 2015 study pointed out the risk that due to illiquidity, funds facing redemptions might be forced to sell at “fire sale” prices). Director Grim noted that the goal of the SEC’s September 2015 “Open-End Fund Liquidity Risk Management Proposal” is to promote strong risk management across all funds. http://www.sec.gov/rules/proposed/2015/33-9922.pdf. While codifying the 15-percent illiquid securities “bucket” that exists for funds other than money market funds, this new rule would introduce the need for liquidity risk management and would offer the option of “swing pricing.” This is a mechanism to charge redeeming shareholders with the cost of liquidating positions.
Modernizing Information Reporting
The SEC published in May a proposal entitled “Investment Company Reporting Modernization,” and received 779 comments. A consistent theme was concern for the privacy of monthly portfolio holdings information filed with the SEC. Grim noted that holdings information privacy is an issue raised by many comment letters that the staff is working on.
2016 Initiatives for Registered Advisers
Registered investment advisers should anticipate rulemaking regarding “transition” planning against major disruptions in their business. This would be in addition to business continuity planning, now required by Rule 206(4)-7. Transition plans, according to Grim’s March 2015 speech to the IAA Compliance Conference, should be expected to address “key person” risk and asset liquidity risk, including the ability of clients to move assets away from their adviser. Large investment advisers should anticipate stress testing related rule making. In addition, the staff is considering a recommendation to the SEC to mandate third-party compliance reviews.