Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News January 23, 2012 Issue

IM Adds Derivatives Expertise

The SEC has made a few strategic hires recently that will bolster its ongoing review of derivatives use in the fund industry.

Last month, the Division of Investment Management hired CFTC attorney Paul Schlichting to boost its derivatives expertise. Earlier this month, the Division strategically upped its ETF expertise when Barry Pershkow joined its ranks. Pershkow, most recently an attorney with Morgan, Lewis & Bockius, worked for years with ProFunds Advisors, a significant operator of the leveraged and inverse ETFs that the SEC and other regulators are seeking to learn more about.

The SEC launched its review of the use of derivatives by mutual funds, exchange-traded funds, and other investment companies back in March 2010. At the time, the SEC also suspended its review and approval of applications to operate leveraged and inverse ETFs while it explored the effect these products have on the markets. Leveraged and inverse ETFs invest heavily in derivatives as part of their strategy to outperform various indicators of market performance.

In a statement at the time, Division director Buddy Donohue said, "Although the use of derivatives by funds is not a new phenomenon, we want to be sure our regulatory protections keep up with the increasing complexity of these instruments and how they are used by fund managers. This is the right time to take a step back and rethink those protections."

As if to prove the SEC’s point, shortly after the review was announced the markets experienced the May 6, 2010 "flash crash," which ultimately was blamed in part on the effects of automated ETF trading.

A number of current staffers helped construct the architecture of the relief that allows leveraged and inverse ETFs to operate. However, arguably one of the chief architects, Michael Mundt, left the SEC for private practice a while back.

Bringing in expertise with practical knowledge of these funds and the derivatives on which they rely will be a huge boost to the staff’s review effort, said one industry observer.

It may also work to reopen the process for approving more leveraged and inverse ETFs in at least some form. Since the SEC suspended authorizing these funds, it has been criticized as skewing the leveraged and inverse ETF playing field in favor of the relatively limited number of sponsors authorized to operate them.