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News November 23, 2015 Issue

Asset Management Initiatives Figure Prominently in SEC 2017 Budget Request

Don’t expect the SEC focus on new rules and enforcement for the asset management industry to slow down any time soon. Based on Commission chair Mary Jo White’s testimony before Congress on November 18, investment advisers and broker-dealers remain high on the agency’s action list.

"We plan to continue to focus on completing our mandatory rulemakings while pursuing other initiatives that are critical to our mission, including those relating to asset manager oversight, equity market structure, and our disclosure effectiveness review," she said before the U.S. House Committee on Financial Services. "We will also continue to strengthen our enforcement and examination programs, striving for high-impact efforts that protect investors and preserve market integrity."

As for the fiscal year 2017 budget request itself, the SEC has yet to publicly release any figures, but Bloomberg has reported it as being for $1.822 billion, which is about $100 million more than the agency’s FY 2016 request of $1.722 billion. The agency justified that request by detailing how the additional dollars would be used to bring on board more examiners, which would address concerns about not having enough staff to conduct needed exams, as well as other personnel. White’s testimony this month, however, did not provide such a breakdown, which most likely will be released with the official budget request.

Any head of a federal department or agency, in justifying its budget request to Congress, typically makes the case that the money Congress is being asked to authorize will be well-spent, and that it has been well-spent in past years. White’s testimony, while also a window into what the SEC prioritizes, should be considered in that context.

That said, "the House hearing on the SEC’s 2017 budget request with White did not reveal any spectacular new revelations," said Ropes & Gray counsel David Tittsworth. "It’s clear that the Republicans think the SEC can live well within the agency’s existing resources. Democrats generally think the SEC needs more resources to carry out its growing mandates. Since Republicans will continue to control the House for the foreseeable future, the SEC’s budget will not grow by any significant degree."

Coming proposed rules

White noted that, in addition to major sets of rules already proposed by the SEC (see below), the months ahead will likely see additional proposed rules. "At my direction, the SEC staff is working on additional initiatives aimed at helping to ensure the Commission’s regulatory program is fully addressing the increasingly complex portfolio composition and operations of the asset management industry," she said.

The four coming proposals she listed were:

  • Use of derivatives by investment companies. "SEC staff is working on recommendations to the Commission to propose new requirements related to the use of derivatives by registered funds, including measures to appropriately limit the leverage these instruments may create and enhance risk management programs for such activities," White said.
  • Transition plans for investment advisers. White noted that SEC staff is also currently developing recommendations that would require advisers to create and maintain transition plans in the event of a major business disruption.
  • Stress testing. These proposed requirements would be for large advisers and funds, she said.
  • Third-party compliance reviews. This one is for investment advisers and would require advisers to have third-party compliance reviews conducted. "The reviews would not replace examinations conducted by our Office of Compliance Inspections and Examinations, but would be designed to improve overall compliance by registered investment advisers," White said.

Rules already proposed

White also discussed a number of rules already proposed by the SEC this year that are likely to be adopted in the coming year. These include:

  • Liquidity risk management. This is the rule, proposed September 22, that would require open-end funds to adopt and implement liquidity management programs. Mutual funds, with the exception of money market funds or ETFs, would be authorized to use swing pricing. Comments on these proposals will be accepted by the SEC through January 13, 2016, White noted, adding that the Commission "has already received substantial public comment, and all comments received will be analyzed" before final rules are formulated.
  • Portfolio reporting. Form N-PORT, a new monthly portfolio reporting form, "would require registered funds other than money market funds to provide portfolio-wide and position-level holdings data to the Commission on a monthly basis," she said.
  • Census reporting. Another new document, Form N-CEN, would require annual reporting from investment companies of "certain census-type information." The new form would "streamline and update information reported to the Commission to reflect current information needs, such as requiring more information on ETFs and securities lending," White said. It would replace Form N-SAR.
  • Structured data. Portfolio and census reporting would need to be provided to the SEC in a structured data format, something that "would improve the ability of the Commission and the public both to aggregate and analyze information across all funds and to link the reported information from any other sources," White said.
  • Enhanced disclosure and website communications. Funds would need to provide more on their financial statement disclosures, which would be standardized. They could also provide shareholder reports, as an option, on their website.
  • Form ADV changes. Under these, investment advisers would be required to provide additional information, including about their separately managed accounts, and address issues that SEC staff have identified since a set of previous Form ADV changes.

"White continues to set forth a very aggressive agenda for the remainder of this year and 2016," said Investment Adviser Association president Karen Barr.