SEC Chair Addresses Risks & Regulatory Safeguards for the Asset Management Industry

Investment Management Update

Date: December 17, 2014

On December 11, 2014, SEC Chair Mary Jo White gave a speech discussing the SEC’s plans for enhancing and strengthening its response to the regulatory issues presented by the asset management industry. White noted that the framework established by the Investment Company Act of 1940 and the Investment Advisers Act of 1940 provides the SEC with three significant tools in regulating the asset management industry:

  • Controls on conflicts of interest
  • A registration, reporting and disclosure regime
  • Controls on fund composition risks and operational risks

In light of recent industry developments, White decided to concentrate her speech on the controls on fund portfolio composition risks and operational risks. She outlined three initiatives the SEC is pursuing to better address these risks.

First, she stated that the current reporting obligations of funds and advisers have not kept pace with the emergence of new products and strategies in the marketplace. As examples, she cited the lack of information regarding securities lending by funds and investment in increasingly complex derivatives. Accordingly, White stated that the reporting and disclosure of fund investment in derivatives, the liquidity and valuation of their holdings, and their securities lending practices should be significantly enhanced.

Next, White cited the liquidity risk derivatives pose to funds. Noting funds’ increased use of derivatives in recent years, she stated that the SEC staff is considering implementing broad risk management programs to address the risks of liquidity and derivatives use. Additionally, she said the SEC staff was reviewing other potential requirements such as updated liquidity standards, disclosures of liquidity risks or measures to limit the leverage created by a fund’s use of derivatives.

Finally, White discussed transition planning and stress testing, citing the issues investors may face when an investment adviser is no longer able to serve its clients. In response, she stated that the SEC staff is working on a recommendation to require investment advisers to create transition plans to respond to major business disruptions. Also, White said the SEC staff was considering what stress testing protocols would be appropriate for investment advisers and investment companies.

White concluded her speech by discussing the SEC’s role as a financial regulator in addressing “systemic risks,” noting that it was not the SEC’s objective to eliminate all risk. Instead, she stressed the importance of implementing changes to effectively regulate current market realities.


For more information, please contact:

Andrew J. Davalla

Michael V. Wible

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.