SEC Chair White Highlights Regulatory Initiatives for Investment Companies

SEC Chair Mary Jo White outlined new agency initiatives in investment company regulation. She delivered her remarks before the 2016 General Membership of the Investment Company Institute.

As to contemporary asset management initiatives, Chair White identified the following as the most significant areas for regulation: conflicts of interest, registration, reporting and disclosure, portfolio composition and operational risks. Chair White highlighted the recent rulemakings on liquidity and derivatives as examples of the SEC’s new focus.

Chair White stated that the Division of Investment Management is reviewing fund disclosure effectiveness, and the SEC staff is undertaking further review of exchange-traded funds. While emphasizing technology risks, the use of service providers and the importance of accurate portfolio pricing, Chair White encouraged funds to focus on valuation, performance advertising and issues that may arise when funds make payments to intermediaries for the distribution of fund shares.

Lofchie Comment: The SEC’s proposals regarding liquidity and derivatives have been subject to significant negative reaction. The common theme from both industry and academic critics is that these proposals are economically simplistic and only appear to reduce risk. This may work for the economically unsophisticated (e.g., those who believe that all derivatives are inherently risk-creating), but in reality, those fearful of derivatives would increase risk by discouraging the use of hedging techniques that employ derivatives.

Chair White acknowledged that the SEC received critical feedback on both proposals. Regarding the derivatives proposal, she stated: “many commenters, however, are not in favor of the proposal’s portfolio limitations and some have provided a range of suggested modifications and alternatives.” Concerning the liquidity proposal, she noted: “many [commenters] expressed concerns about the liquidity classification framework and operational challenges for swing pricing.” It remains to be seen how, or even whether, the SEC will respond to these important criticisms.