Acting Director of the SEC Division of Investment Management Talks About Data, RIC’s and Liquidity

Acting Director of the SEC Division of Investment Management (“Division”) Dave Grim delivered remarks at the PLI Investment Management Institute. He discussed the Division’s priorities regarding data reporting, the use of derivatives by registered investment companies (“RICs”) and liquidity requirements.

Mr. Grim stated that the Division currently is reviewing its information-collection strategies in order to “enhance and modernize” data reporting to the SEC. He mentioned that the SEC is considering making updates to the basic census information requirements of Form N-SAR to reflect new market developments, products, and investment practices or risks. The Division staff also is evaluating ways to standardize the information required to be reported regarding certain investments, including swaps, forwards and securities lending.

Additionally, Mr. Grim explained that the SEC plans to assess the use of derivatives, and to take a “more comprehensive and systematic approach to derivatives-related issues under the Investment Company Act,” including considering whether funds should be required to establish broad risk-management programs to address risks related to their derivatives use. He also acknowledged that the Investment Company Act contains no provisions that deal specifically with derivatives, and that the SEC essentially has been crafting a regulatory scheme based on treating derivatives as “senior securities.”

According to Mr. Grim, the SEC has not reviewed the guidelines for liquidity management in “many years.” The current guidelines state that “open-end funds (other than money market funds) generally were not permitted to hold [any] more than fifteen percent of their net assets in illiquid securities and other illiquid assets.” The Division, according to Mr. Grim, is considering recommending a new “comprehensive approach to the management of the liquidity risks associated with fund portfolio composition,” which would address the redemption rights of investors, improve investment companies’ management of liquidity risk, and update the liquidity standards and disclosures of liquidity risks.

Lofchie Comment: Although Mr. Grim indicated a number of prioritized areas for the Division of Investment Management, he gave little indication of why those areas were prioritized. For example, it is not clear that the Division is concerned about funds being insufficiently liquid and, if so, what the basis for that concern might be.