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Remarks to the Investment Company Institute’s 2016 Mutual Funds and Investment Management Conference

David W. Grim, Director, Division of Investment Management

Orlando, Florida

March 14, 2016


Good morning, everyone, and thank you, David, for that kind introduction, as well as for inviting me to speak here today. Before I begin, let me remind everyone that the views I express here today are solely my own, and do not necessarily reflect the views of the Commission, the Commissioners, or any of my colleagues on the staff of the Commission.[1]

I am very pleased to be here with all of you today, and to deliver the keynote address for this year’s conference. It is also a pleasure to be joined at the conference by several of my colleagues from the Commission’s staff, who will participate in a number of panels over the next few days. In addition to staff members from other Divisions at the Commission, you’ll have the opportunity to hear from several talented and experienced members of the Division of Investment Management. They include Diane Blizzard, Associate Director of the Division’s Rulemaking office, who will anchor the regulatory panel for, I believe, the third year running; Sarah ten Siethoff, an Assistant Director in our Rulemaking office, who will participate in what I am sure will be an informative discussion of liquidity risk management; Matt Giordano, the Division’s Chief Accountant, who will update you on various accounting matters; Chris Stavrakos, a senior analyst in our Risk and Examinations office, who will discuss the Commission’s data analytics initiatives; and Dan Townley, an Attorney Fellow in our New York office, who will discuss the use of derivatives. I know each of them will have useful insights to offer on these and other topics.

The past few years have marked an especially eventful time for the Division of Investment Management (the “Division”). In fact, these years have been one of the most vibrant and innovative periods for the Division that I can recall. The past year alone witnessed the Commission’s proposal of several important rulemakings in the investment management space, including a proposal that would modernize reporting and disclosure by registered investment companies,[2] a proposal that would promote effective liquidity-risk management throughout the open-end fund industry,[3] and, most recently, a proposal to update and enhance the regulation of funds’ use of derivatives.[4]

In addition, the Division continued its Senior Level Engagement program last year, which allows us to have productive and candid discussions with the executive leadership and boards of a variety of funds and asset managers on a range of topics, including the novel challenges posed by an increasingly complex investment landscape. Moreover, over the past twelve months, the Division issued approximately 26 no-action letters, acted on approximately 156 applications for exemptive relief, and published five guidance updates, including one addressing the challenging issue of cybersecurity. During the 2015 calendar year, Division staff also reviewed filings that covered over 12,000 funds. And, despite all of that, the Division’s hardworking staff still found time to prepare for and host a celebration of the 75th anniversary of the Investment Company Act of 1940 and the Investment Adviser Act of 1940. Not a bad list of achievements for a single year—and it is all due to the hardworking staff of the Division of Investment Management.

Periods of especially intense activity, like the past year, tend to put me in a contemplative frame of mind. I find it useful at such times to pause and reflect on what we as a Division have achieved, what lessons can be gleaned from our experiences, and how we can better fulfill our core mission of protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation. In that vein, I thought I would devote my time today to sharing with you some views on the various initiatives the Division is currently pursuing, as well as my thoughts on some recent occurrences in the investment management space.

Pending Rulemakings

I’d like to begin by discussing some of the proposed rulemakings from the past year. I am sure everyone here understands that I cannot go into too much detail on matters that may come before the Commission in the near future. But I do want to share with you some initial impressions regarding the comments the Commission has received on some of these rulemakings.

But before I do that, I want to thank commenters for providing such fulsome and thoughtful responses to our recent proposals. In my experience, the rulemaking process works best when it involves a dialogue between the Commission and all of the various stakeholders. Accordingly, I encourage you to weigh in whenever you think you have information, expertise, or insights that would inform the staff’s thinking about a proposed rule. And I would especially urge you to furnish the Commission with any data or analyses that could provide a unique empirical perspective. Your vigorous participation in the rulemaking process is crucial.

Liquidity Risk Management and Swing Pricing

Now, it seems that many of you have already followed this advice with regard to the Commission’s liquidity-risk management proposal. In fact, we received almost 80 comment letters in response to this proposal alone.[5] We are still in the process of giving these comments the careful and thorough analysis that they warrant. Our initial review has revealed that a number of commenters recognized the benefits of requiring open-end funds to implement robust liquidity-risk management programs. These commenters noted that proper oversight of liquidity risk is a vital aspect of prudent fund management. Several commenters also acknowledged that swing pricing could be a worthy endeavor, since it holds the promise of a more equitable allocation of transaction costs, as well as the possibility of enhanced fund performance over the long term.

A number of commenters also focused on certain aspects of the proposal’s suggested approach to overall liquidity management. Among the issues raised by some commenters is whether the proposal’s goals could be better achieved through alternative approaches, especially with regard to the proposal’s liquidity classification framework and the three-day minimum liquidity requirement. We appreciate these comments, and are closely reviewing the various alternatives to the proposed approaches that have been suggested.

As I mentioned, I cannot speak to the relative merits of the issues that have been raised by different commenters. I can assure you, however, that we understand your concerns, that we are taking them very seriously, and that they will inform the Division’s thinking as we move toward crafting final rules. Simply put, we hear you.

The spirited response to the liquidity-risk management proposal is certainly understandable. But I think many would agree that recent events, particularly in certain areas of the bond markets, have led some advisers to renew their focus on liquidity risk management. Mutual funds witnessed sharp spikes in outflows during periods of intense market volatility in August and December of last year,[6] and last December also saw global bond funds incur their largest outflows since June 2013.[7] And, as you all know, last December also witnessed the total suspension of redemptions by one open-end fund. Fortunately, that situation ultimately proved to be limited. Yet, it certainly underscores the hard truth that prudent liquidity management has become even more vital in today’s markets.

Reporting Modernization

I’d like to turn now to the proposal to modernize and enhance the reporting framework for investment companies and investment advisers. I view this proposal as vital to the Division’s mission, since it would allow the Division to broaden and deepen its understanding of funds and the manner in which they operate. Few would dispute that the investment management industry has witnessed transformational changes in the past decade, not only in terms of the products it offers, but also in terms of the investment strategies it pursues, and even the technology on which it relies. To keep pace with such a rapidly evolving industry, both the Commission and investors should have access to more substantive and more uniform information about funds and their advisers.

A review of the comments we have received reveals that, here, too, a number of commenters acknowledge the potential benefits of the proposed approach. At the same time, some commenters urged the Commission to consider certain possible ramifications of the proposal. For example, some commenters questioned whether, in collecting portfolio information from funds, the Commission could become a target for cyber criminals looking to exploit this cache of information.

I want to emphasize again that the Division appreciates your comments. The staff is thoroughly assessing commenters’ input as it plans to develop a final rule for the Commission’s consideration. Although I cannot address any specifics about the approach the Division may recommend for the final rule, I would like to briefly discuss some of the ways the Commission is addressing cybersecurity, particularly for the information that it collects.

Chair White has acknowledged the critical importance of cybersecurity on a number of occasions, and has taken steps to ensure that the Commission’s cybersecurity protocols are as robust as possible. For example, to help the Commission continue its efforts to strengthen its cyber security posture, Chair White has requested funds from Congress to maintain and enhance the Commission’s cyber capabilities.[8] Furthermore, consistent with the federal government’s Information System Continuous Monitoring methodology, the Commission remains focused on enhancing awareness of its information security status, including its vulnerabilities and the threats it faces. Such awareness is an essential component of any effective cybersecurity regime, as it supports risk-response decisions, and offers insights into the effectiveness of the Commission’s security controls. The Commission is also implementing certain cybersecurity protocols that are consistent with those recommended by the National Institute of Standards and Technology, which develops frameworks for cybersecurity risk mitigation. Finally, the Commission plans to focus on bolstering its ability to respond rapidly and effectively to any unauthorized intrusions that may occur.[9] In sum, I believe the Commission remains focused on cybersecurity, and that it is working diligently to continue to be a responsible steward of the information it collects.

The Commission also continues to assess the comments received on the reporting modernization’s proposal to permit mutual funds and other registered investment companies to provide shareholder reports by making them accessible on their websites, as well as the funds’ quarterly portfolio holdings for the past year. The proposal, if adopted, would allow investors who want paper copies to continue to receive them by mail. This part of the proposal generated a number of comments, and the staff is carefully considering the various viewpoints that have been expressed.


Now, I’d like to turn briefly to the Commission’s proposal to provide a more comprehensive approach to funds’ use of derivatives. The comment period on this proposal closes at the end of this month, and we are looking forward to your comments. The staff is genuinely interested in receiving data regarding the use of derivatives and how the proposal could affect funds and investors, as well as any responses to the questions posed in the release.

Reflections on Recent Events

I’d like to turn now to Third Avenue Management’s decision last December to wind down its Focused Credit Fund. Those events highlighted a number of longstanding issues that have broader relevance for the investment management industry. Division staff is analyzing the events of last December carefully to distill the lessons that can be learned. Although that analysis remains ongoing, I do have some initial thoughts that I’d like to share with you.

First, I want to emphasize my view that any fund contemplating the extraordinary step of suspending redemptions should approach the Division as soon as possible. I believe investors fare best when a fund facing acute liquidity pressures brings the Division into the conversation at the earliest possible juncture.

Second, the events of last December have led me to spend some time thinking about the contours of the open-end fund structure. Some have expressed the view that certain assets are simply too illiquid to be held in large concentrations by open-end funds.[10] Under such an assumption, I believe certain investment strategies—such as those focused heavily on distressed debt—may be more suitable as closed-end or private funds, rather than as funds that are subject to daily redeemability. I think this issue is one that fund management and boards ought to weigh carefully. This issue also highlights for me how important it is for funds to implement robust policies and procedures to ensure that their investment strategies are appropriate for an open-end structure, both at a fund’s inception and throughout the life of a fund. I would encourage fund management and boards to view the events of last December as an invitation to revisit the adequacy of their own protocols for vetting new funds that will be subject to daily redeemability.

Finally, the events of last December have crystallized for me just how effective the liquidity risk proposal could be in enhancing funds’ ability to manage the liquidity risks of their portfolios. For example, if adopted, the liquidity proposal would require open-end funds to apply a standard set of factors when assessing their liquidity risks, including cash flow projections that take into account historical redemptions. Open-end funds would also be required to adopt a written program reasonably designed to assess and manage these risks. In addition, a fund’s board would review the fund’s liquidity risk management protocols, providing an added layer of objective oversight to management’s determinations. And, equally important, if adopted, the proposal would also provide Commission staff and investors with more detailed information about open-end funds’ liquidity profiles. This information could be particularly useful in helping staff to identify and monitor sections of the fund industry that could pose heightened liquidity risk.

Risk Disclosure

So what else has the Division been doing to ensure that the Commission remains an effective regulator of the investment management industry? Quite a bit, actually. The staff of the Division issued several IM Guidance Updates last year, and has already issued two such updates this year. I’d like to spend some time discussing the most recent update, which provides guidance intended to help funds provide risk disclosures that remain robust when market conditions are changing.

Lincoln once said that important principles must be inflexible, and in my view, ensuring that fund disclosures are accurate and complete is just such a principle. Effective fund disclosures are a pillar of the Investment Company Act’s investor protection framework. And I believe nowhere is the need for effective disclosure more acute than with respect to the various risks that funds face. As we all know, however, risk has a fluid quality. Changing market conditions can dramatically heighten certain risks, while simultaneously causing other risks to wane. As a result, whenever market conditions begin to shift materially, I believe funds should consider whether their funds’ risk disclosures need to be revised to warn of a changing risk profile.

To help ensure that funds provide adequate risk disclosures during changing markets, the Division’s recent guidance emphasizes basic practices that funds should consider.[11] For example, the guidance stresses the importance of routinely monitoring market conditions and gauging the impact of changing conditions on the fund and its investments. The guidance goes on to note that funds should determine whether any significant market developments rise to the level of being material to investors. If so, the guidance encourages funds to review their existing risk disclosures and determine if they continue to accurately describe the risks confronting their funds.

In the event that a fund deems it necessary to update its risk disclosures, the guidance encourages funds to consider all appropriate avenues for communicating with investors. Specifically, the guidance recommends that funds consider not just the more traditional methods of shareholder communication, such as prospectuses and shareholder reports, but also less formal methods, including posting updates to the fund’s website or sending letters directly to shareholders.

The guidance also shares examples of how some funds have revised their risk disclosures in an effort to keep pace with recent market developments, including rising interest rates and Puerto Rico’s struggles to service its debt. [12] I hope these examples will help other funds gain insights into how they can disclose other consequential events. As always, if you have additional views on this topic, I encourage you to share them with me or the staff.

Thoughts on Other Initiatives

I’d like to turn now to some other issues that I have been thinking about in recent months. As Chair White recently noted, the Commission is increasingly looking to tools beyond disclosure requirements to address the novel challenges posed by a constantly shifting investment management landscape.[13] Consistent with that approach, the Division is working to develop proposed rules for the Commission’s consideration that would require registered investment advisers to create and implement transition plans. In addition, as required by the Dodd-Frank Act, the staff is also developing a recommendation for new requirements for stress testing by large investment advisers and investment companies.

Again, I’m limited in what I can say about these potential rulemakings, but I did want to share some thoughts about how one recent market event underscores the importance of mitigating operational risk, particularly through proper business continuity planning. Funds are relying increasingly on technologies and services provided by third parties to conduct their daily operations. But this convenience comes at a cost. For example, last August, a computer malfunction at one financial institution prevented it from calculating accurate net asset values for hundreds of mutual funds and exchange traded funds. The situation could have been far worse had the outage persisted. Furthermore, the incident revealed that some funds could have been better prepared for the possibility that one of their critical service providers would suffer an extended outage.

Reflecting on these events, I think some useful lessons can be drawn. First, when fund complexes outsource critical functions to third parties, they should conduct thorough initial and ongoing due diligence of those third parties. An important component of such due diligence is to explore the service provider’s business continuity and disaster recovery protocols, and to understand how your own business continuity plan addresses the risk that a key service provider could suffer a significant business disruption. In the case of last August, the service provider had a backup system in place, but that system also failed. In light of that, I think it is appropriate for funds to focus on their oversight of key service providers and the robustness of such vendors’ business continuity plans, including how they intend to maintain operations during a significant business disruption.

Equally important, fund complexes may want to consider how they can best monitor whether a service provider has experienced a significant disruption (such as a cybersecurity breach or other continuity event) that could impair its ability to provide uninterrupted services, the potential impacts such events may have on fund operations and investors, and the communication protocols and steps that may be necessary to successfully navigate such events.

In addition, I believe fund complexes should consider having a detailed playbook for responding to various scenarios, whether those disruptions occur internally or at a key service provider. If history teaches us one thing, it is that once a crisis strikes, it is already too late to being formulating a response.


I’ll conclude my remarks today by again thanking the ICI for inviting me to speak. As I prepared for this event, it occurred to me that I am approaching my one-year anniversary as Director of the Division of Investment Management. Looking back on the past year, I was struck by the tremendous dynamism of the Division that I now lead. To keep pace with an ever-evolving industry, the staff of the Division of Investment Management has had to evolve, as well. It has done so in a variety of ways, including by collecting new forms of data, using that data in different and more creative ways, and by acquiring additional skillsets and expertise. The staff has achieved much in the past few years, and I hope I have conveyed to you all today how proud I am of it.

Thank you.

[1] I would like to thank my colleague, Neil Lombardo, for the valuable assistance he provided in assisting with the preparation of these remarks. The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any Commission employee or Commissioner. This speech expresses the views only of the speaker, and do not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

[2] Investment Company Reporting Modernization, Investment Company Act Release 31610 (May 20, 2015) [80 FR 33589 (June 12, 2015)], available at

[3] Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment Company Reporting Modernization Release, Investment Company Act Release No. 31835 (Sept. 22, 2015) [80 FR 62273 (Oct. 15, 2015)], available at

[4] Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No. 31933 (Dec. 11, 2015) [80 FR 80884 (Dec. 28, 2015)], available at

[5] The comment file for this proposal can be found at the following address:

[6] Sean Collins, High-Yield Bond Mutual Fund Flows: Some Perspective, Investment Company Institute (Dec. 16, 2015), available at; Charles Stein, Investors Withdraw Most from U.S. Mutual Funds Since June 2013, BloombergBusiness (Sept. 2, 2015), available at; Charles Stein, Investors Pull Out of Mutual Funds at Fastest Rate in Two Years, BloombergBusiness (Dec. 15, 2015), available at

[7] Jenny Cosgrave, Bond funds see record outflows after junk jitters, CNBC (Dec. 18, 2015), available at

[8] See U.S. Securities and Exchange Commission FY 2017 Congressional Budget Justification, 127, available at

[9] Id.

[10] See, e.g., Amy Feldman, How Mutual Funds Should Handle Illiquid Investments, Barron’s (Jan. 9, 2016) available at

[11] Fund Disclosure Reflecting Risks Related to Current Market Conditions, IM Guidance Update, No. 2016-2 (Mar. 2016), available at

[12] To further illustrate how funds can highlight current market conditions in a manner the Division believes can make their risk disclosures more timely, meaningful, and complete, the guidance provides examples of how funds dealt with recent market events. For instance, the guidance discusses how some funds bolstered their risk disclosures to explain in detail how the end of an extended period of historically low interest rates could affect their funds’ performance, and even lead to heightened risks. Some funds went still further, providing numerical examples clarifying how rising interest rates could potentially inhibit the performance of longer-term securities. In addition, the guidance also discusses some of the approaches that funds took when updating their disclosures to deal with Puerto Rico’s financial struggles, such as by including disclosures in prospectuses, shareholder reports, and fund websites as the territory has experienced financial difficulties. Id.

[13] Chair Mary Jo White, Chairman’s Address at SEC Speaks, Beyond Disclosure at the SEC in 2016 (Feb. 19, 2016), available at

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Modified: March 14, 2016