Remarks to the PLI Investment Management Institute
Director, Division of Investment Management
New York, NY
March 6, 2014
Good morning and thank you, Paul for your kind introduction and for inviting me to speak today. Before I begin, let me remind you that the views I express today are my own and do not necessarily reflect the views of the Commission, any of the Commissioners, or any of my colleagues on the Commission staff. 
I am pleased to speak today before legal practitioners who share the Division of Investment Management’s focus on and commitment to a well-functioning, investor-focused asset management industry.
Average American investors participate in the securities markets predominately through the registered funds that the Division oversees. These funds have more than $16 trillion in assets. This is why the Division’s mission — protecting investors, promoting informed investment decisions, and facilitating appropriate innovation in investment products and services through regulating the asset management industry — is so vitally important.
This past year was an exciting and successful one for the Division. In addition to fulfilling our core responsibilities, such as reviewing and analyzing the documents that so critically describe to investors what their money is invested in and considering requests for interpretive guidance, exemptive applications, and no-action relief, my team and I worked on several significant rulemaking initiatives.
Let me begin my remarks with one of the last, and also one of the most significant, of our accomplishments from last year. In December, the Commission, together with the banking regulators and the CFTC, adopted final rules implementing the provisions of the Dodd-Frank Act known as the Volcker Rule.  While working to prevent risks that can stem from proprietary trading and investments in private funds by banks, the Volcker Rule is also designed to maintain the strength and flexibility of the domestic capital markets.
The final rule reflects the collaborative efforts of the many financial regulators involved and of multiple divisions and offices within the Commission. As a further indication of this collaborative effort, and in light of the many market participants and regulators that Volcker touches, Commission staff, along with staff from the banking regulators and the CFTC, continue to participate in interagency working group meetings so that staff from each of the agencies can communicate on a regular basis on questions from market participants, on technical issues, and on supervision and examination approaches.
The Volcker Rule was not the only example from last year of regulatory coordination that required thoughtful joint action. We also worked with our fellow regulators at the CFTC on the “Identity Theft Red Flags Rules”, rules that require funds, broker-dealers, advisers and other regulated entities to adopt programs and guard against ID theft. These rules help to achieve important investor protection goals, particularly as the risk of identity theft has grown due to the expansion of information technology and electronic communication — each of which has made it increasingly easy to collect, maintain, and transfer personal information about individuals.
Last July the Commission adopted a new rule to implement a JOBS Act requirement to lift the ban on general solicitation and general advertising for certain offerings, including private fund offerings. On the same day, the Commission also proposed amendments that would require, among other things, issuers to provide the Commission with additional information about securities offerings in order to enhance the agency’s ability to evaluate the development of market practices in Rule 506 offerings.
Now I would like to turn to my expectations for the coming year which promises to be an equally busy one on the rulemaking front.
Money market mutual fund reform has been an important focus of the Division for some time, and it remains a key priority for 2014. Last June, the Commission proposed additional money market mutual fund reforms, which were designed to address money market mutual funds’ susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks. 
The Commission’s proposal included two alternatives that could be adopted alone or in combination. Under the first alternative, prime institutional money market funds would be required to transact at a floating net asset value, not at a $1.00 stable share price. Government and retail money market funds would be permitted to maintain a $1.00 stable share price. Under the second alternative, money market funds would continue to transact at a stable share price, but would be able to use liquidity fees and redemption gates in times of stress.
The staff is currently reviewing and analyzing the more than 1,400 letters that we received, with a view towards making a recommendation to the Commission.
The Commission has benefitted greatly from the monthly data that Form N-MFP provides us about money market fund holdings, which was the result of the 2010 money market mutual fund reforms. In particular, we have used the data to inform policy and rulemaking, and produced solid information for examination and enforcement use. For example, the recent enforcement action against Ambassador Capital Management stemmed from an ongoing analysis of money market fund data by IM staff that involved a review of the gross yield of funds as a marker of risk.
Moving beyond money market funds, the staff is considering ways to improve the information we receive about other mutual funds, closed-end funds and ETFs. As a result, staff is undertaking an initiative to develop a recommendation that would modernize and streamline the information that funds are reporting to the Commission to give us more timely and useful information about fund operations and portfolio holdings. In pursuing this initiative, the staff’s goal is to not only improve the quality of the data we receive and to inform our efforts to monitor risk, but also to reduce unnecessary burdens by making the reporting regime workable with, or at least minimally disruptive to, a fund’s systems, eliminating duplicative filings, and addressing concerns about front-running. As another example, we are considering recommending that the Commission propose substantial improvements to Form N-SAR. As part of this overhaul, we are aiming to preserve the most useful items in Form N-SAR, adding some others that we think would be particularly valuable, and eliminating those in the form that we’ve found to be less useful. Among issues under consideration is how frequently reports should be filed, for example annually rather than semi-annually as is currently required. In addition, reports could be filed in a structured format, replacing the DOS filing that is currently required. As we pursue this rulemaking, we would like to partner with industry participants to get their perspective on the various filings currently required. We look forward to our collective work on this important initiative, which, if done right, would be a big step forward for us as well as investors, the industry, and the public generally.
Considering reforms for variable annuity disclosure is also a policy priority of the Division for 2014. Our efforts on this project are critical to improving communications about these products that are sold to seniors and others who are seeking ways to fund their retirement. The mutual fund summary prospectus offers a useful model for providing variable annuity disclosure. It is admittedly a challenge — and a very worthwhile one - to boil down long and complex disclosure about variable annuities into the key facts that investors need to know about the complexities and costs, as well as the benefits, of their investment. For example, we are considering whether to recommend that the Commission require key information to be disclosed to new investors in a standardized order — as it is with mutual funds’ summary prospectuses, e.g., contract benefits, risks, fees and charges, and investment options.
I’ve focused so far on rulemakings, but want to reiterate that the guidance we provide and our review of disclosures is just as important. In fact, staff work diligently with funds on improving disclosures to be clear and compliant with our various forms. Our staff also analyze requests for exemptive relief and no-action guidance, respond to investor and industry questions and help shape enforcement cases.
One focus of the Division’s efforts in 2014 will be to carry forward our recently established practice of issuing staff Guidance Updates on a regular basis. Guidance Updates, which are available on the IM Webpage, are a vehicle for enhancing our communications with the public and addressing a range of disclosure, regulatory, and compliance matters, by setting out the staff’s views on a particular matter in a timely and transparent way. The Division issued 14 Guidance Updates during 2013 and three so far in 2014. Let me give you an overview of what we have addressed:
- In January, we issued guidance suggesting steps fund advisers may consider with respect to risk management and disclosure relating to changing fixed-income market conditions.
- The Division also issued guidance that facilitates compliance with both SEC and CFTC disclosure and reporting requirements and applies our robust disclosure and compliance regime specifically in the context of fund investments in commodities. 
- Another example in the disclosure area is our November guidance stating our views and concerns with respect to fund names that suggest safety or protection from loss.
- We have also provided a recent Guidance Update related to funds unbundling material amendments to their charters in proxies.
- And we also issued a Guidance Update in response to a report from the SEC’s Office of Inspector General which detailed examples of firms failing to comply with the terms of their exemptive orders, which exposes these firms to the risk of violating securities laws.
- We also issued guidance on counterparty risk management practices with respect to tri-party repos, in which we encourage money market fund advisers to consider the legal and operational steps they may need to take if a repo counterparty fails and the repos it issued default.
In the investment adviser space, the staff also issued several notable guidance pieces:
- For example, we issued staff guidance regarding how the venture capital exemption in the Advisers Act is applied in certain circumstances.
- We also addressed aggregation of investor assets across private funds advised by related advisers for purposes of the qualified client definition. The staff guidance in this area is reflective of our continuing efforts to review the regulatory requirements of the Advisers Act that are now applicable to private fund advisers and determine how they should be updated to address investor protection concerns and the business models of private fund advisers. We are also conscious that we now have close to 40 percent of our registered investment advisers as advisers to private funds.
As you can see, the Division’s Guidance Updates covered a broad variety of topics and I only presented you with a flavor of the issues we have covered. We expect to continue issuing Guidance Updates when appropriate topics are identified and in continuation of our mission and I encourage you to follow our web site for new postings. I would also encourage you to contact the staff if you have ideas about any investment management areas that would benefit from greater clarification, because the Division welcomes input from all of our stakeholders, including investors, industry participants, and others.
In addition to Guidance Updates, the staff issued over 30 no-action and interpretive letters in 2013 and responded to thousands of e-mail and phone questions from practitioners, the industry and the public.
A notable recent example is a staff no-action letter that was just issued in February of this year to the Nuveen Investment Funds regarding the ability of affiliated securities lending agents to negotiate certain rebate rates with borrowers. The Nuveen letter re-affirmed the position the staff took in the 1995 Norwest letter, while at the same time being flexible enough to accommodate industry practice, provided appropriate safeguards are in place to protect the lending fund.
The staff also reviewed and finalized 115 exemptive applications last year. The exemptive application process is the “laboratory” where we consider new ideas that market participants have. This process is the way the Division carries out the part of its mission to “facilitate appropriate innovation,” consistent with the protection of investors.
As you can see, the Division of Investment Management achieved important milestones last year. The Division has also been progressing with a program of change to develop a culture of continuous improvement. To that end, last year the Division undertook a process to better understand our key strengths, as well as areas for improvement. The goals of this process were to encourage a collaborative working environment, both internally and with outside stakeholders; to increase information and knowledge sharing; and to provide transparency in our work processes. One output from this process has been a restructuring of the Division from six groups into four that better align with our key functions: 1) disclosure; 2) guidance; 3) rulemaking; and 4) business operations, which includes risk monitoring and analysis. In addition to increasing efficiency, we also hope that the reorganization will eliminate the temptation for registrants and their counsel to “forum shop” throughout the Division — for example by calling different offices within the Division when deciding whether to pursue a matter as a no-action request or an exemptive application.
IV. RISK AND EXAMINATIONS OFFICE
Let me also take a moment to mention the Division’s Risk and Examinations Office — what we call REO. Last year, David Grim gave you a highlight of our goals for REO. And we have come a long way since starting the office in 2012.
As Chair White mentioned in her speech at the recent SEC Speaks event, the Division is working on an “action plan” to expand our asset manager risk management oversight program. The initiative to modernize and streamline the information that funds are reporting to the Commission that I mentioned earlier is part of that action plan and REO also plays an important role.
We now have 17 staff in REO — with approximately half of those staff in DC and the other half in New York. These staff — made up of financial analysts, lawyers, accountants and industry specialists - work on quantitative and qualitative financial analysis of the investment management industry. REO is assisting in IM efforts as part of a larger Commission initiative to obtain and analyze data to keep up to date with market trends and operational integrity issues, inform policy and rulemaking, and assist the staff in its examination, enforcement and risk monitoring activities. Not only does REO work in close collaboration with OCIE staff, but it also keeps open direct lines with the industry. One example of this effort is reflected in the meetings with senior management of several large asset management firms that REO staff, OCIE leadership and I have been a part of.
I hope that my snapshot of the Division’s work has given you a sense of how we go about accomplishing our mission, as well as of our commitment to enhancing our effectiveness at accomplishing that mission. As I said earlier, we strive to keep lines of communication open with the industry and we welcome you to contact us with questions or ideas for areas where our guidance would be helpful.
In looking back on the past year, I’m very pleased with what we have accomplished. And I am excited about what lies ahead.
Thank you for your attention and have a great conference.
 The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, Bank Holding Company Act Release No. 1 (December 10, 2013), available at http://www.sec.gov/rules/final/2013/bhca-1.pdf.
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §619, 124 Stat. 1376, 1620 (2010) (codified at 12 U.S.C. §1851).
 Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 30551 (June 5, 2013), 78 FR 36834-01, available at http://www.sec.gov/rules/proposed/2013/33-9408.pdf.
 Risk Management in Changing Fixed Income Market Conditions, IM Guidance Update 2014-1 (Jan. 2014), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2014-1.pdf.
 Disclosure and Compliance Matters for Investment Company Registrants That Invest in Commodity Interests, IM Guidance Update 2013-05 (Aug. 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-05.pdf.
 Fund Names Suggesting Protection From Loss, IM Guidance Update 2013-12 (Nov. 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-12.pdf.
 Unbundling of Proxy Proposals —Investment Company Charter Amendments, IM Guidance Update 2014-2 (Feb. 2014), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2014-02.pdf.
 Compliance with Exemptive Orders, IM Guidance Update 2013-2 (May 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-02.pdf.
 Counterparty Risk Management Practices with Respect to Tri-Party Repurchase Agreements, IM Guidance Update 2013-3 (July 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-03.pdf.
 Guidance on the Exemption for Advisers to Venture Capital Funds, IM Guidance Update 2013-13 (Dec. 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-13.pdf.
 Status of Private Fund Investors as Qualified Clients, IM Guidance Update 2013-10 (Nov. 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-10.pdf.
 Nuveen Asset Management, Inc., et al., SEC Staff No-Action Letter (pub. avail. Feb. 14, 2014).
 Norwest Bank Minnesota, N.A., SEC Staff No-Action Letter (pub. avail. May 25, 1995).