United States: MJW To FSOC: We're On It

In a keynote address before the Investment Company Institute on May 20, 2016, SEC Chair Mary Jo White signaled to the Financial Stability Oversight Counsel (FSOC) that the SEC is "working hard" to finalize rules that address potential systemic risks in asset management.

The reminder follows FSOC's recent statements that it continues to focus on systemic risks in certain asset management products, and in advance of an anticipated statement by the Financial Stability Board (FSB) on the same topic.  Chair White noted that the SEC is finalizing proposed rules on fund reporting, liquidity risk management and fund use of derivatives, which, among other things, are issues that FSOC and the FSB have publicly raised.

In what may be a subtle jab at the banking regulators, Chair White said the SEC advocates for "dynamic and robust regulation" that will meet all of the current and future risks and challenges, "while preserving the features that have served investors so well for more than seven decades."  Fostering dynamic regulation for asset management, she said, has been one of the "critical responsibilities of the SEC since 1940."

In addition to summarizing the SEC's recent regulatory initiatives, Chair White provided a peek at future regulatory initiatives.

We can expect the SEC to tackle disclosure issues and technology challenges (especially cybersecurity) soon.  But, Chair White said, events over the past 10 years have "sharpened our focus" on particular types of funds that "require our enhanced attention."

ETFs.  Specifically, Chair White identified exchange-traded funds (ETFs) as a target of enhanced regulatory attention.  In light of recent market volatility, the 2010 "flash crash," and lackluster liquidity, among other events, the SEC's staff is now "looking closely at the interconnectedness of the prices of ETF shares and their portfolio holdings and the impact on investors when the ETF's mechanism does not function efficiently."  The SEC staff is also focusing on how broker-dealers sell ETFs, and how investors understand these practices.

Disclosure.  Chair White announced a "disclosure effectiveness initiative" to address fund performance disclosures.  She said that the SEC's staff will determine whether any improvements to disclosure requirements can be improved, and whether all information contained in a prospectus and statement of additional information (SAI) is necessary or helpful to investors.

Technology.  Chair White said that cybersecurity poses one of the greatest challenges facing the fund industry, and that the SEC will continue to draw attention to this issue.  She said that the SEC is also focused on technology disruptions that can affect pricing.

Portfolio pricing.  Chair White emphasized that portfolio valuation continues to be an SEC priority, and that the SEC and investors expect that funds price their portfolio holdings and shares accurately; Chair White said that she, along with fund investors, expect funds to "get it right."

Our Take
In our view, a significant takeaway is that the SEC has subtly reminded the federal banking regulators that it is aware of their concerns about systemic risk in asset management and that the SEC, as the primary securities regulator, will deal with it.  This statement should reassure skittish markets that fear attempts by the banking regulators to assert jurisdiction over the asset management universe.

We note also that the SEC has identified ETFs as a prime focus.  We expect to see more to come in this area.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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