On December 14, 2014 Chair Mary Jo White of the Securities and Exchange Commission (“SEC”) spoke at the New York Times’ DealBook Opportunities for Tomorrow Conference. She concentrated on the SEC’s future enhancements of risk monitoring and regulatory safeguards for the asset management industry, specifically: data reporting, portfolio composition risk controls and transition planning for advisers. Following are some key takeaways:
- Chair White spoke about how the SEC relies on data reporting in order to understand the industry. She noted the rapid growth of the industry from $4 billion assets under management in 1940 to $63 trillion assets under management in 2014. As a result, the SEC has implemented new data reporting tools largely due to the Dodd-Frank Act. However, the SEC still only receives information from about a quarter of all registered firms. The SEC will release new recommendations for modernizing and enhancing avenues for data reporting that are already in place.
- She also addressed portfolio composition risk and operational risk. Portfolio composition risk refers to the risk of mixing a fund’s investments. These can include risks associated with liquidity and leverage. Noting that operational risk involves the possibility of internal process and system failures, she emphasized these in relation to exchange-traded funds (ETFs) and the use of derivatives by mutual funds. The SEC will likely require broader portfolio composition and operational risk management policies for advisers to these types of funds in the future.
- The final focal point of Chair White’s speech was transition planning and stress training for investment advisers. She pointed out that clients are severely at risk when an investment adviser is no longer able to operate. One especially problematic example is if there are restrictions on the use of a client’s money that is held by an investment adviser. The SEC is preparing recommendations for avoiding issues related to the termination of an investment advisory arrangement.
Chair White’s speech at the New York Times is a sign that the SEC is becoming increasingly interested in data reporting, portfolio composition risk controls and transition planning for advisers. The SEC is planning on new rules or amendments for each of these core points. In addition, there will likely be more reporting requirements for private funds in the near future. Investment advisers should keep an eye out for the possibility of new obligations in all of these areas.