In testimony before the House Committee on Financial Services on November 18, 2015, SEC Chair Mary Jo White described what the SEC has in store for the investment management industry.

Chair White said that, in addition to recent rule proposals concerning liquidity risk management and disclosure enhancements, the SEC staff is working on additional initiatives “aimed at helping to ensure that the Commission’s regulatory program is fully addressing the increasingly complex portfolio composition and operations of the asset management industry.”  These initiatives include:

  • Use of Derivatives by Investment Companies. SEC staff is working on a recommendation that the Commission propose new requirements related to the use of derivatives by registered funds, including measures to appropriately limit the leverage these instruments may create, and to enhance risk management programs for such activities.
  • Transition Plans for Investment Advisers. Staff is also developing recommendations that the Commission propose requiring investment advisers registered with the Commission to create and maintain transition plans to prepare for a major disruption in their business.
  • Stress Testing for Large Investment Advisers and Large Investment Companies. Staff is also considering recommending that the Commission propose new requirements for stress testing by large investment advisers and large investment companies. Such rules would implement, in part, requirements under section 165(i) of the Dodd-Frank Act.
  • Third-Party Compliance Reviews. At the Chair’s direction, the staff is also preparing a recommendation to the Commission for proposed rules that would mandate third-party compliance reviews for registered investment advisers. The reviews would not replace examinations conducted by the SEC’s Office of Compliance Inspections and Examinations, but would be designed to improve overall compliance by registered investment advisers.

Our take.  These initiatives indicate that the SEC, carefully watching the Financial Stability Oversight Council in its rearview mirror, continues to focus on assessing and monitoring systemic risk.  These initiatives may limit current fund practices and strategies and increase compliance costs.