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Remarks to the ICI 2015 Securities Law Development Conference

David Grim, Director, Division of Investment Management

Washington, D.C.

Dec. 16, 2015


Good morning everyone, and thank you, David, for that kind introduction and for inviting me to speak here today. Before I begin, let me remind you that the views I express are my own and do not necessarily reflect the views of the Commission, any of the Commissioners, or any other colleague on the staff of the Commission.[1] Before I begin, I should mention that I’m joined here today by several of my Investment management colleagues—Diane Blizzard, who will be participating shortly in the “Looking to the Future: What Funds Should Expect in 2016” panel, Aaron Schlaphoff, who will be participating in the derivatives panel, and Sarah ten Siethoff, who will be participating in the fixed income funds panel. We are also joined by several of our colleagues from around the Commission, including Katherine Feld from the Commission’s Office of Compliance Inspections and Examinations (OCIE) and Anthony Kelly from the Commission’s Division of Enforcement.

It feels like not that many years ago, I was sitting in this very audience as a new SEC staffer. It’s a privilege to now be on this stage and address you today. Many of you have met with me or engaged with me during my 20 years at the Commission. But you might not know that at the start of every meeting I attend—and believe me, I am not lacking for meetings—I ask myself and the staff three questions:

“Does this protect investors?”

“Is this facilitating capital formation?”

And, when it applies, “How does this maintain market integrity?”

In our work, we constantly strive to strike a balance among the three prongs of our mission. You might recall, former Chairman Walter used to talk about “Aunt Millie” as the image of who we in the Commission are compelled to protect. And that has always struck a chord with me—I have a 102-year old Aunt Millie. And my own Aunt Millie is always in the back of my mind as we lay out new ground in the asset management industry.

Today, I will focus my remarks on how the recent steps we’ve taken and our thinking for what the future holds serve our mission.

I can’t touch on what we’ve done without first highlighting how 2015 marked an important year for us—it commemorated the 75th anniversary of the Investment Company Act of 1940 and the Investment Advisers Act of 1940 (collectively, the “Acts”). As you can imagine, this milestone served as a time to reflect and to look forward.

The two Acts helped to shape the financial markets by providing an ever-flexible framework—one that allows for appropriate regulation and investor protection. No one in 1940 could have predicted the innovative products or structures that would exist 75 years later. Just to name a few—we’ve seen an increase in the use of derivative instruments and other alternative strategies, the creation of target date funds with asset allocation strategies, ETFs, and even exchange-traded managed funds.

The Acts have withstood the test of time and allowed us to adapt to the ever-changing securities industry, but we can’t rest on our laurels. Our job as the primary regulator of funds and asset managers is to improve and modernize the regulatory scheme while keeping the SEC’s mission at the forefront.

This past year, we have taken a fresh look at many of our processes and evaluated our current guidance. And as you know, we ultimately determined that it was time to take action in a number of important areas, as the Commission proposed rules to modernize the outdated data collection process and improve the regulatory framework regarding derivatives, liquidity and fund and adviser reporting.

Rulemaking Initiatives in 2015

The staff kicked off 2015 hard at work to address three areas that long were in need of updating, as outlined by Chair White last December.[2] One recommendation, in fact, just proposed by the Commission last week, seeks to enhance the regulation of funds’ derivatives use. The Commission also recently proposed requiring mutual funds and ETFs to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. And finally, earlier this year, the Commission put out for public comment our recommended proposal to modernize and enhance data reporting for both registered funds and investment advisers.


Let’s start with the most recent: enhancing derivatives regulation.

As you are all aware, in 1979 the Commission provided guidance on certain trading practices in a release we call the 10666 release.[3] Since that time, there has been a dramatic growth in the volume and complexity of those and similar transactions, including derivatives. Particularly over the past 20 years, we have observed a dramatic increase in the volume and complexity of the derivatives market, and the increased use of derivatives use by certain kinds of funds.[4]

For that reason, the staff has been evaluating whether the current regulatory framework as applied to funds’ use of derivatives remained appropriate. In 2011, the Commission published a concept release on funds’ use of derivatives to assist with the evaluation and to solicit public comment on the current regulatory framework.[5] The Commission requested comment on a number of areas—including potential implications for fund leverage, diversification, and exposure to securities-related issuers.

We carefully reviewed the comments received on the concept release and the benefits, risks and costs associated with funds’ use of derivatives. DERA economists also analyzed funds’ use of derivatives and found that some funds use derivatives extensively, while many funds do not use derivatives and most do not use a substantial amount.[6]

As I stated, on Friday, the Commission proposed new exemptive rule 18f-4, which is designed to address the investor protection purposes and concerns underlying section 18 while providing an updated and more comprehensive approach to the regulation of funds’ use of derivative transactions. The rule would permit a fund to enter into derivatives transactions, notwithstanding Section 18’s restrictions on senior securities, provided that the fund complies with three primary sets of conditions. The first set of conditions would require funds to comply with one of two alternative portfolio limitations designed to limit the amount of leverage a fund may obtain through derivatives transactions and other senior securities transactions. The second set of conditions requires a fund to manage the risks associated with its derivatives transactions by maintaining an amount of “qualifying coverage assets,” which generally consist of cash and cash equivalents. Lastly, funds relying on rule 18f-4 would be required to have formalized risk management programs if their derivatives exposure exceeds 50% of their net assets or if they use complex derivatives transactions.

Liquidity Management

Another area the staff has been seeking to enhance is funds’ management of their liquidity. Very little guidance on liquidity management practices even exists. The Commission published guidelines[7] more than twenty years ago regarding open-end fund liquidity, and recent industry and market developments and a paper published by DERA economists underscored the importance of funds’ liquidity risk management and the need for reforms.[8] For instance, our staff has observed significant growth in funds with less-liquid strategies, and an evolution in the settlement periods and fund redemption practices.

In September, the Commission unanimously approved proposed rules designed to enhance liquidity risk management by open-end funds.[9] A major reason for these liquidity reforms is to promote strong liquidity risk management by all funds, and to bring consistency across the industry in liquidity risk management practices. The additional data collected as a result of these reforms also would allow staff to better examine funds’ liquidity profiles.

Under the proposal, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. The rules would codify a 15% limit on illiquid assets, consistent with current Commission guidelines. In addition, the reforms would provide a framework under which mutual funds could elect to use “swing pricing” to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity. In connection with these reforms, a number of forms would be amended so that funds include disclosure relating to swing pricing, liquidity classification, and lines of credit, among other things. The importance of this initiative has been underscored by market events since the proposal.

Modernizing and Enhancing Information Reported by Registered Investment Companies and Investment Advisers

Finally, I’ll turn to our other initiative to modernize the reporting scheme for funds and advisers.[10] The Commission relies on the data filed with us for a variety of purposes, including monitoring industry trends, informing policy and rulemaking, identifying risks, and assisting in examination and enforcement efforts. But, our ability to effectively utilize data is naturally limited by the type and format of the information we are able to collect and analyze.

Over the years, the asset management industry has grown in size and in complexity. As a result, our staff found it necessary to examine the data collection forms currently in place and evaluate whether reforms were necessary. In May, the Commission unanimously approved proposed new rules and forms, as well as amendments to certain rules and forms, to modernize the reporting and disclosure of information by registered investment companies and investment advisers.

The proposed rules would establish a new monthly portfolio reporting form which 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. They also would establish a new reporting form that would require registered funds to annually report certain census-type information to the Commission. Further, the proposed amendments would require enhanced and standardized disclosures in the financial statements that are required to be disclosed in fund registration statements and shareholder reports.

The information that would be reported on these proposed forms would be in a structured data format, which would enable the Commission and the public to better aggregate and analyze information across all funds.

We already received approximately 779 comments on the proposal relating to investment companies, which we have begun to review closely. One issue raised by many commenters, including the ICI, is the security of fund portfolio holdings information filed with the Commission.[11] I believe that this is an important issue, and when the staff prepares a recommendation for adoption of final rules, it is certainly something on which we intend to focus.

I can’t emphasize enough how important it is for staff to receive thoughtful comments from you and other stakeholders. We recognize that these proposals have a very real impact on you and on investors. Explanations of those impacts and any concrete benefits or costs of those impacts help us—the rule-writers and regulators—formulate better policies.

I expect that in 2016 the Division will be focused on reviewing comments on these critical reforms and monitoring market developments as we consider recommendations for the Commission on these initiatives.

Rulemaking Initiatives for 2016

Addressing risks in the asset management industry was a main focus in 2015 and will continue to be in 2016. We are developing recommendations on a range of issues related to funds and their advisers.

Transition Planning

The Division is considering a recommendation to the Commission to require registered investment advisers to create and maintain transition plans in the event of a major disruption in their business.

The staff’s recommendation regarding transition plans will be informed by current requirements for registered investment advisers, and designed to complement existing compliance programs.[12]

Stress Testing

As required by the Dodd-Frank Act, our rulemaking staff is also considering a recommendation that the Commission propose new requirements for stress testing by large investment advisers and investment companies. Our hope is that the implementation of this mandate will help large advisers and funds and the Commission better understand the potential impact of stress events.

* * *

And finally, I’d like to briefly touch upon two other initiatives on which our staff is working with staff of other offices and divisions. First, IM staff, working closely with staff in Trading & Markets, as well as staff throughout the agency, is working to develop a recommendation to the Commission to establish a uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. And second, our staff is working in conjunction with staff from OCIE on a recommendation for the Commission to propose a new requirement for registered investment advisers to establish a program of third-party compliance reviews.

* * *

I think it’s fair to say that a lot has changed in the twenty years since I started at the Commission — for one, the asset management industry was simpler. Today, there is more complexity in the offerings to investors. In 2015, the SEC oversees registered investment companies with a combined $17.8 trillion in assets, and registered investment advisers with approximately $67 trillion in client assets.

As we look ahead, we will continue to strive to strike a balance between meaningful regulation that protects investors and facilitating capital formation when appropriate.

I know that I have focused a lot on the rulemaking efforts of our staff. And while we are extremely proud of the rulemaking efforts completed in 2015, as you know, the Division does more than just rulemaking. I have the honor of working with nearly 200 smart and dedicated staff members who are committed to carrying out the Division’s critical mission. We have numerous staff dedicated to reviewing fund disclosure, responding to inquiries from the public, analyzing requests for exemptive relief and no-action guidance, shaping enforcement cases, and evaluating data received through filings.


I would now like to turn the focus to the guidance we issue formally through no-action letters, interpretive letters and more informally by responding to thousands of e-mail and phone questions from practitioners, the industry and the public. As you know, the staff periodically releases IM Guidance Updates to help clarify our positions on certain topics. These updates generally result from emerging asset management industry trends, discussions with industry participants, reviews of registrant disclosures, and no-action and interpretive requests.

This past year, we released guidance on a range of topics such as investment company consolidation, cybersecurity and co-investment transactions by business development companies (“BDCs”). Our cybersecurity guidance, for instance, stemmed from discussions with fund boards and senior management at advisers during the course of the Division’s senior level engagement and monitoring efforts, and OCIE’s review of adviser cybersecurity practices. The guidance update outlined the staff’s view of measures that funds and advisers may wish to consider in addressing cybersecurity risk. I encourage you to check our website for our guidance updates and no-action and interpretive letters.

Staff also has been monitoring developments with respect to the money market fund rule amendments that the Commission adopted in July 2014. This past spring, the staff published on the Division’s website a series of Frequently Asked Questions on issues related to the money market reform. As the October 2016 compliance date for the implementation of floating NAV, liquidity fees, and redemption gates approaches, the staff will continue to monitor developments and work hard to provide additional guidance as needed.


We strive to remain focused on the SEC’s mission, and one way in which we do so is through the disclosure review process. Through the disclosure review process, staff identifies new and recurring issues that may result in policy guidance and rulemaking. In its review of investment company disclosures, our Disclosure Review and Accounting Office staff continues to be particularly focused on a number areas, including, fees, investment strategies, and industry trends such as the use of derivatives by funds and changes to existing variable annuity products. Recently, our Disclosure Office has undertaken a project to evaluate staff comments on the disclosures it reviews each year. The Division has taken on this project with several goals in mind, including seeking consistency throughout the Disclosure Office, assessing the effectiveness of staff comments as disclosure evolves over time in response to industry developments, and providing guidance to registrants on important disclosure issues. One example is our recent outreach to bank loan funds, seeking enhanced disclosure regarding the extended settlement period for bank loan transactions. Our focus was the potential impact of the extended settlement period on a fund’s liquidity needs and the resulting risks to a fund’s investors.


I stressed earlier how important it is to have relevant data to effectively analyze trends and monitor the industry. IM’s Risk and Examinations Office has been instrumental in analyzing the data we collect. Most recently, REO disseminated its first report that provides private fund industry statistics and trends on a periodic basis.[13] This report reflects data collected through Forms PF and ADV, and provides certain aggregated and anonymized census data and statistics. We believe that the statistics collected will help us identify trends and practices, and help investors better understand the industry.

Emerging Risks

In addition to identifying trends and practices in the industry, the Division has also made it a priority to be more forward-looking and proactive. I mentioned earlier that, in 2015, we reexamined our processes and looked for areas on which to improve. Out of this reflection, an emerging risk committee was formed in an effort to ensure that IM staff share information and inform policy on emerging risks. The informal committee consists of staff in varying levels of seniority in each of IM’s offices, and seeks to bring together staff members working on similar issues, in an effort to assess, and internally communicate, potential emerging risks. The hope is that the fruitful discussions of the committee may raise the profile of risk mitigation actions that the Division may be able to take or recommend to the Commission. The committee strives to evaluate the biggest risks and challenges in the industry—for example, one topic its members discussed was the 1940 Act issues surrounding the ETF trading halt that occurred on August 24, 2015.


Anniversaries afford us with an opportunity to take a step back and reflect and think ahead. The Acts have served to protect investors and help build the asset management industry, and have facilitated people, like my Aunt Millie, buying a house, and families across the country investing for their future. And there is no doubt that the Acts have forever changed the regulatory landscape of the asset management industry. But the asset management industry will undoubtedly look remarkably different 75 years from today. It will be a different landscape — new products, new fee structures, new disclosure tools. Precisely what that landscape looks like, only time will tell. However, the Acts have provided us with a flexible framework in which the asset management industry can continue to grow.

As I said earlier, the Division has taken a fresh look at our regulatory scheme. We encourage you do the same, and to let us know your thoughts or concerns. In the end, we all have the investors’ best interests at heart.

I appreciate the opportunity to share with you our work in the Division of Investment Management. Your input is important to us, and I hope that you will continue to engage with us throughout the year.

Thank you for your attention and I hope you enjoy the conference.

[1] I would like to thank my colleague, Elizabeth Miller, for her expertise in the preparation of these remarks. The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. The speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

[2] Last December, Chair White announced several rulemaking initiatives for the Division of Investment Management that would help address the increasingly complex portfolio composition and operations of today’s asset management industry. In her speech, Chair White specifically discussed the importance of (i) modernizing and enhancing data reporting for both registered funds and investment advisers, (ii) requiring registered funds to have controls in place to more effectively identify and manage the risks related to the diverse composition of their portfolios, including liquidity management and the use of derivatives, and (iii) planning for the impact on investors of market stress events and when an adviser is no longer able to serve its clients. See Mary Jo White, Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry (Dec. 11, 2014), available at

[3] Securities Trading Practices of Registered Investment Companies, Investment Company Act Release No. 10666 (Apr. 18, 1979) [44 FR 25128 (Apr. 27, 1979)], available at

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

[5] Use of Derivatives by Investment Companies under the Investment Company Act of 1940, Investment Company Act Release No. 29776 (Aug. 31, 2011), available at

[6] In addition, the staff of the Division of Economic and Risk Analysis (or “DERA”) has extensively studied funds’ use of derivatives and they published a white paper analyzing funds’ use of derivatives. Daniel Deli, Paul Hanouna, Yue Tang & William Yost, “Use of Derivatives by Investment Companies,” Division of Economic and Risk Analysis (2015), available at

[7] Revisions of Guidelines to Form N-1A, Investment Company Act Release No. 18612 (Mar. 12, 1992) [57 FR 9828 (Mar. 20, 1992)], available at

[8] Paul Hanouna, Jon Novak, Tim Riley, Christof Stahel, “Liquidity and Flows of U.S. Mutual Funds,” Division of Economic and Risk Analysis White Paper (September 2015), available at

[9] 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

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

[11] See Comment Letter from Investment Company Institute (Aug. 11, 2015), available at

[12] See Dave Grim, Remarks to 2015 IAA Compliance Conference (Mar. 6, 2015), available at

[13] “Private Fund Statistics,” Division of Investment Management Risk and Examinations Office (Oct. 16, 2015), available at

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Modified: Dec. 16, 2015