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News December 10, 2012 Issue

Champ Describes His Priorities as IM Director

What is Norm Champ thinking?

The not-so-new director of the SEC’s Division of Investment Management offered some insights into just that when he spoke on December 6 before the ALI CLE 2012 Conference on Investment Adviser Regulation in New York.

Champ was tapped to lead the Division back in July. Since then he’s been getting his sea legs, figuring out where the Division is now and developing ideas for where it should be going in the future. Sources on the staff have indicated Champ has set a collaborative tone, asking lots of questions and getting candid and constructive responses.

Apparently, those efforts are bearing fruit.

Champ offered a peek behind the curtain of the Division’s current initiatives relating to advisers, and the approach the staff is taking to determine potential future initiatives. He also shared his own priorities as Division director.

The Big Picture

Champ began by offering a snapshot of the pool of SEC-registered advisers in the wake of Dodd-Frank Act changes. He said that as of November 1, the industry looks like this:

  • Over ten thousand advisers are registered with the SEC now, managing over $49 trillion in assets;
  • There are 6 percent fewer SEC-registered advisers since January 1, managing 14 percent more assets;
  • Close to 40 percent of all SEC-registered advisers manage one or more private funds;
  • 6 percent of all SEC-registered advisers reported having their principal office and place of business outside the U.S.; and
  • Over 2,200 exempt reporting advisers file information on Form ADV with the SEC.

Current Work of the Commission Staff

The Dodd-Frank Act continues to keep the staff busy, said Champ. The Volcker Rule is just one example where the staff is working diligently in-house and with fellow federal regulators to analyze commenters’ concerns and craft a recommendation for the Commission, he said.

Form PF

The staff estimates that the SEC will receive filings on Form PF from approximately 2,500 advisers reporting on behalf of over 23,000 funds. Most of the largest liquidity fund and hedge fund advisers filed their first reports over the summer. Most other advisers of private funds will file their first reports next year.

The PFRD system that was built to accept Form PF filings is successfully accepting and processing a large volume of filings. The staff has answered numerous calls and has posted frequently asked questions about Form PF.

Form PF information will be used by the Financial Stability Oversight Council (or FSOC) to monitor risks to the U.S. financial system and by the SEC to conduct risk assessments of private funds and their advisers, he said.

Based on the staff’s experience to date, Champ offered a few tips.

"First, if you haven’t filed yet, hopefully you have already started to collect the necessary information, he said." Second, he suggested that advisers will likely need to work with others across their organization to gather information for Form PF, because it requires data that the adviser may not have filed or collected before.

Finally, Champ said that to the extent an adviser is unsure about how to answer a question, they should take a reasonable approach to answering the question and then document that approach in Question 4 of the Form.


The comment period on the rule proposal to permit advertising and solicitation of accredited investors in private fund offerings closed on October 5. The SEC received over 160 comment letters, which expressed varying views about the extent to which private funds should be permitted to advertise publicly. The staff is carefully reviewing those comments and considering what recommendations to make to the Commission, said Champ.

Investment Adviser/Broker-Dealer regulatory harmonization

In the study of advisers and broker-dealers that was required by section 913 of the Dodd-Frank Act, the staff recommended a rulemaking to implement a uniform fiduciary standard of conduct for broker-dealers and advisers when they provide personalized investment advice about securities to retail investors.

The staff also recommended that the Commission consider harmonizing broker-dealer and adviser regulation when it adds meaningfully to investor protection. The staff has been working on a request for information and economic data on this issue, he said, and has met with industry participants, investor advocates and others to discuss the recommendations in the study.

Cancellation of Adviser Registration

The Dodd-Frank Act increased the assets under management threshold to be registered with the Commission from $25 million to $100 million. The Commission staff coordinated with state regulators to remind advisers of their obligation to withdraw from Commission registration if they are no longer eligible to remain so registered. On October 19th, the Commission issued a notice stating that it intends the cancel the registration of close to 300 investment advisers that either have not filed a Form ADV amendment with the Commission in 2012 or indicated on Form ADV that they are no longer eligible to remain registered with the Commission. Since the notice was issued, the staff continues to work with state regulators and answer questions from advisers regarding the cancellation process.

Review of Funds’ Use of Derivatives

Champ announced that the Division will resume consideration of exemptive requests relating to actively-managed ETFs.

Applicants must include two representations:

  • That the ETF’s board periodically will review and approve the ETF’s use of derivatives and how the ETF’s investment adviser assesses and manages risk with respect to the ETF’s use of derivatives; and
  • That the ETF’s disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission: and staff guidance.

He said that the staff will continue to defer consideration of exemptive requests relating to leveraged ETFs.

Since March 2010, the staff had deferred consideration of exemptive requests under the 1940 Act relating to actively-managed and leveraged ETFs that would make significant investments in derivatives. This period of deferral allowed the staff to review derivatives use by mutual funds and ETFs. 

At the end of August last year, as a continuation of this ongoing review, the Commission approved the issuance of a Concept Release under the 1940 Act relating to derivatives. 

The Concept Release asked for information on how different types of funds use various types of derivatives as well as the benefits, risks and costs of using derivatives, among other things. It also asked for comment on several specific issues under the 1940 Act implicated by funds’ use of derivatives, such as how to measure the amount of leverage that a fund incurs when it invests in a derivative, how a fund should value derivatives for diversification purposes, and how funds determine the industry or industries to which they may be exposed through a derivative investment.

Since the comment period ended about a year ago, the staff has been actively analyzing the almost 50 comment letters submitted, including many requests to defer any action until the regulatory framework for swaps and security-based swaps is developed.

The staff is following up with certain commenters on the issues or suggestions they have raised, and formulating initial recommendations for potential further guidance. 

"Given the complexity and significance of the issues relating to funds’ use of derivatives, both for the fund industry and for the protection of investors, we are taking a deliberate approach in our continuing review," said Champ.

New IM Risk and Examination Group

A recent initiative in the Division is the creation of the Risk and Examination Group, known as "REG," he said. REG will conduct rigorous quantitative and qualitative financial analyses of the investment management industry, including detailed analyses of strategically important investment advisers and investment companies.

REG has already started to work closely with OCIE to make onsite visits to select strategically important advisers. These visits are designed to increase the staff’s understanding of firms’ risk management activities, generate an active dialog between REG and firms on key risks and issues facing firms and the industry, and help inform policy and the examination process.

Future Division Priorities

Champ reminded the crowd that he came to the Division of Investment Management from OCIE. As OCIE has implemented a risk-based approach to examinations, the staff of the Division is also taking a risk-based approach in evaluating the Division’s regulatory priorities.

Effective resource allocation is one of Champ’s goals, and asked the staff to take a fresh look at policy initiatives with a view to prioritizing those matters based on four factors. The staff will continue to use these factors to analyze policy initiatives going forward.

They are:

  • Identification of the risk to be mitigated or the problem to be solved. This is key to the discussion of any policy initiative, said Champ.
  • The urgency associated with a particular initiative. Urgency may arise from risks to investors, registrants, efficient markets, and capital formation. Going forward, REG will help identify and assess these risks.
  • The potential impact of an initiative on investors, registrants, capital formation, efficient markets, and the Division’s and Commission’s operational efficiency. REG, in collaboration with the Commission’s Division of Risk, Strategy, and Financial Innovation, will help identify and assess many of these potential impacts.
  • The resources associated with a policy initiative. Senior staff will consider this issue.

"In essence, we’re applying a systematic cost-benefit analysis to the prioritization of our work," said Champ. "We’re looking at factors that further the SEC’s mission as well as the impact that various regulatory approaches would have on investors, capital formation, and efficient markets."

Several potential initiatives have emerged in this process. Two are of particular interest to advisers, he said.

Issues raised by newly registered private fund advisers.

First, the staff has received a number of questions and suggestions from newly-registered advisers to private funds about how certain provisions of the Advisers Act and related rules apply to their businesses.

For example, how do the Advisers Act advertising rules and staff positions apply to private fund advisers, especially in light of the JOBS Act? How do certain provisions of the books and records rule apply to advisers of private equity fund?

The staff is considering these and other issues raised by private fund advisers and is conducting a broad review of how these regulatory requirements apply to private fund advisers. The staff is considering what action, if any, should be taken or recommended to the Commission to address these questions.

Valuation guidance for mutual funds.

Second, the staff believes there is a need to provide additional guidance on valuation of securities held by registered investment companies.

Although the SEC web site contains a host of information on valuation, including reference materials, Commission and staff guidance, and enforcement actions, the staff believes additional guidance is warranted. "We believe additional guidance in this area would be useful because much has changed since the Commission last issued guidance regarding valuation," said Champ.

Champ cautioned that all initiatives are ultimately for the Commission’s consideration and may or may not come to fruition. He welcomed input on issues of importance to investment advisers and their clients however, saying "[w]e are interested in hearing from all of our constituencies."

Additional Priorities within the Division

Continuous improvement.

Besides taking a consistent, risk-based approach in considering regulatory priorities, it is also crucial to strive for continuous improvement, said Champ.

Commission-wide the SEC is striving to be a continuous improvement organization, looking for ways to work smarter and work better. The initiative to develop more robust cost-benefit analyses in Commission rulemaking is one example of this. This includes a more integrated analysis of economic issues in rule releases and earlier involvement of economists to analyze alternative policy options.

New expertise.

The Division is also arming itself with new expertise. The Division has acquired or is actively looking for business expertise in the areas of private funds, ETFs, derivatives, and financial analysis. In addition, the Division recently established REG.

More staff from the Division will be present on examinations to help them learn more about the business and to assist examinations staff on questions that arise during exams.

Self improvement.

More broadly, the staff has begun an intensive inquiry into the work of the Division itself.

The inquiry seeks a better understanding of Division strengths, areas for improvement, and opportunities that are available to exploit those strengths and improve operations.

This inquiry is referred to as "Moving Ahead," and comprises five broad categories – people, processes, technology, structure, and strategy.

"While the staff is currently in the early phase of this initiative, I am excited about its prospects and hope that I will have more to report to you in the future," said Champ.