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Remarks to the Investment Management Institute 2013

Norm Champ, Director, Division of Investment Management

New York, NY

March 7, 2013

David W. Grim, Deputy Director, Division of Investment Management

U.S. Securities and Exchange Commission


Good morning.  I am pleased to be here today on behalf of Norm Champ, Director of the Division of Investment Management.  Norm very much wanted to be with you today, and I am very pleased to have the opportunity to step in for him and deliver these remarks on his behalf.

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 of my colleagues on the staff of the Commission.

As I said, it is a privilege to deliver Norm Champ’s keynote address at this year’s Investment Management Institute.  It is a privilege because I have the opportunity to open up the conference on behalf of a number of seasoned and expert legal practitioners who are speaking to you today.  They are very knowledgeable and highly regarded in their fields. 

It is a privilege because I have the opportunity to hear from and interact with two prior Directors of the Division of Investment Management, each of whom used his time and energy in that job to shape the regulatory landscape for the benefit of investors.

But most of all, it is a privilege to be here today because we have an audience comprised of professionals who want to learn more about the law; improve your own legal skills; and take back practical, real-world lessons and implement them at your own firms and offices. 

Programs of this type are always enriching and beneficial to those who are willing to take the time to improve their own legal skills and add to their base of knowledge.  Both Norm and I genuinely commend you for it.

* * *

Norm Champ has been on the job as Director of the Division of Investment Management for eight months.  And I have been serving as Deputy Director for nearly two months. 

For those of you who are not familiar with the role of the Division of Investment Management at the SEC, our mission is to work for American investors by: 

  • protecting investors
  • promoting informed investment decisions and
  • facilitating appropriate innovation in investment products and services

through regulating the asset management industry.

The issues we work on are interesting, but more importantly, they have great consequence for America’s investors.  I would hazard that nearly everyone in this room has invested in a mutual fund, an ETF or another investment product regulated under statutes administered by the Division of Investment Management.    

The rules we help construct; the disclosure we review; and the new products we analyze have an impact on you and on millions of American investors like you.  We have a lot of responsibility on our plate.  And we take it very seriously.

Regulatory Initiative Process

What most SEC-watchers are always interested in hearing about is rulemaking activity, so, on behalf of Norm, I plan to focus on that.  But that is in no way intended to diminish the important disclosure review; exemptive applications analysis; data review; and development of legal guidance that the Division of Investment Management performs.

Like the rest of the SEC, our Division is focused on implementation of our statutorily mandated rulemaking under the Dodd-Frank Act and the JOBS Act.  In most cases, however, the bulk of statutorily required rulemaking that affects entities regulated within the Division of Investment Management’s jurisdiction is either complete, such as the required registration of advisers to private funds, or is being led by other parts of the agency and we are serving as consultants to assure that the asset management industry is covered consistently, such as in the general solicitation rules.  In other areas, such as the Commission’s review of the standards of conduct and regulatory requirements that apply to broker-dealers and investment advisers, we are partnering with other parts of the SEC and are not the sole lead.

Where the Division of Investment Management has, under Norm Champ’s leadership, spent a lot of time focusing our energy and trying to become smarter, more strategic and more targeted, is on so-called “discretionary” or non-mandated rulemaking initiatives.

The Division of Investment Management, in close consultation with the Chairman and the Commissioners, went through a very thoughtful and deliberate approach to analyze potential regulatory initiatives.

In this era of limited budgets, one of my goals since taking the helm of the Division has been to ensure that we are allocating our resources wisely.  Toward this end, Norm Champ asked the staff to take a fresh look at policy initiatives with a view to analyzing those matters based on four factors.  These factors also will be used to analyze potential policy initiatives going forward.

The first factor is identification of the risk to be mitigated or the problem to be solved.  This is key to the discussion of any policy initiative.  

The second factor is the urgency associated with a particular initiative.  Urgency may arise from risks to investors, registrants, efficient markets, or capital formation.  

The third factor is the potential impact of an initiative on investors, registrants, capital formation, efficient markets, and the Division’s and SEC’s operational efficiency.

The fourth and final factor is the resources associated with a policy initiative.  As with all our activities and projects, senior staff in the Division need to assess how best to allocate scarce resources.

We’re looking at factors that we believe would further the SEC’s mission as well as the impact that various regulatory initiatives would have on investors, capital formation, and efficient markets. The analysis has helped to inform the Chairman, collaborating with the Commissioners, in her determination of which regulatory priorities the Commission will pursue.

At this point you are probably asking yourselves what specific future regulatory priorities came out of this process.  There are three short term and five longer term core priorities. 

Short-Term Regulatory Priorities

Potential Money Market Mutual Fund Reform

The first short-term regulatory priority is money market funds, which may be the most high-profile issue on the Division’s plate these days. 

Late in 2012, the SEC’s economists published a significant study on money market funds that responded to questions posed by three SEC Commissioners.  The results of that study have served as a catalyst for renewed and energized focus by the SEC staff and Commissioners on additional structural reform of money market funds. 

At the direction of the Chairman, the staff is engaged with the Commissioners and hard at work on developing a money market fund reform recommendation. 

Identity Theft Red Flags Rules

The second of the Division’s short-term rulemaking priorities involves rules to detect and prevent theft of the identities of mutual fund investors and clients of asset managers.  The growth and advancement of information technology and electronic communication have made it increasingly easy to collect, maintain and transfer personal information about individuals. Advancements in technology, however, also have led to increasing threats to the integrity and privacy of personal information. 

In February 2012, the SEC proposed rules and guidelines jointly with the CFTC to require many of the entities we regulate to establish identity theft detection and prevention programs.  These proposed rules were designed to help protect individuals, and help individuals protect themselves, from the risks of theft, loss, and abuse of their personal information. 

The rules would give effect to the transfer of authority, under the Dodd-Frank Act, from the Federal Trade Commission to the SEC and CFTC for responsibility for overseeing the identity theft and protection programs of the entities we regulate.  The comments on the proposed rules were generally supportive, and the Division is working on final identity theft red flags rules to recommend to the Commission.

Valuation Guidance

Striking an appropriate and accurate net asset value each trading day is one of the most important, and often one of the most challenging, functions that mutual funds and other investment companies perform.  It is one thing to identify prices for a large cap equity fund that is investing in frequently-traded, highly-liquid securities.  It is quite another for a fund that is heavily invested in thinly-traded bonds, derivative instruments and other securities that have no readily-available market price to draw from.

The Division is working to provide the fund industry, fund directors, and the public with guidance under the Investment Company Act regarding funds’ and fund directors’ valuation responsibilities.  In addition to wanting to assure accuracy of mutual fund transaction prices, valuations also affect performance claims.  Furthermore, fund advisers’ fees are usually calculated and paid based on asset valuations.  There is a natural incentive for advisers to want those valuations to be as high as possible. 

Inaccurate valuations will lead to inaccurate performance claims; inaccurate fee payments; inaccurate transaction prices and ultimately mis-pricing can muddy the integrity of the fund industry.  When it comes to valuation, the Division of Investment Management believes that we need to level set requirements and make sure funds and their directors are aware of prudent practices that will lead to fair and accurate valuations.

In developing valuation guidance, the staff recognizes the benefit of input from the public and those who work hard every day to strike an accurate NAV.  We therefore are exploring ways to assure that the staff and the Commission get meaningful public input on any valuation guidance.

Longer-Term Regulatory Initiatives

Each of the three short-term regulatory priorities I mentioned is actively being worked on by staff in the Division of Investment Management.  In addition, there are five longer-term rulemaking projects that we are scoping the terms of and allocating resources toward.  These projects are in a less advanced stage, but we want to share them so that investors, funds and advisers, taxpayers and others are aware of where we are focused and devoting resources.

Variable Annuity Summary Prospectus

A few years ago, the Commission adopted a streamlined “summary prospectus” for mutual fund investors.  That document contains key information about fund investment objectives and strategies, risks, and fees and provides the ability to “click through” or request more detail for those who want it.  This initiative was a revolution in communicating to investors the core information they most want while simultaneously making more detailed information readily accessible to investors, intermediaries, the financial press, and others who are interested. 

The Division is beginning work on a rule that would create a similar summary prospectus for variable annuities, a type of hybrid insurance and investment product.  The insurance benefits offered by these products, and the limitations on those benefits, are often complex; their costs can be difficult to understand; and they frequently offer a wide array of investment options.   These and other factors often result in disclosure that is long and difficult to understand.  Our goal is to facilitate the communication of concise, user-friendly information to investors considering variable annuities and enhance the transparency of the benefits, risks, and costs of these products.

ETF Rule

In 2008, the Commission proposed a rule that would basically codify exemptive relief that we routinely grant for exchange-traded funds.  This rule would allow ETFs to operate without obtaining individual exemptive relief -- a process that, while important for novel products, can be costly and time-consuming. 

If ETFs of new sponsors could come to market without having to obtain their own exemptive relief, the Division could reallocate staff resources from the review of “plain vanilla” applications to more novel applications.  The Division has renewed its efforts to pursue implementation of this type of ETF rule. 

Enhancements to Fund Disclosures about Operations and Portfolio Holdings

As part of the money market fund reforms adopted by the SEC in 2010, the SEC required new monthly reporting on portfolio holdings by those funds to both investors and the SEC.  This new data has been invaluable.  Some have called it a game-changer.  We are able to use it to monitor trends, identify outliers and better inform our rule-writing efforts. 

Many believe we need similar structured data reporting for other mutual funds and investment companies.  The patchwork of outdated data collection and disclosure forms is not working, and the staff is examining how to enhance and streamline our data collection efforts.

The purpose of this initiative is to improve the quality and usefulness of information that funds provide to investors and to the SEC, and to eliminate duplicative filings or disclosures.  It could make the SEC a better regulator and it could make investors better informed. 

Review of the Rules that Apply to Private Fund Advisers

In 2012, approximately 1,500 advisers to hedge funds and other private funds registered with the Commission as investment advisers as a result of the Dodd-Frank Act.  Private fund advisers now account for nearly 40% of our registered investment advisers.

Given the increase in the number and variety of registered private fund advisers, the Division is reviewing Advisers Act rules for aspects that should be updated to address investor protection concerns and the business models of private fund advisers.

Derivatives Concept Release

And finally, the Division also continues to consider the numerous issues raised in the Commission’s 2011 concept release on funds’ use of derivatives.  When the Investment Company Act was enacted in 1940, it did not contemplate funds investing in derivatives as many do today.  Indeed, the use and complexity of derivatives have grown significantly over the past two decades.

Over the years, the SEC and the Division have addressed a number of issues raised by the use of derivatives on a case-by-case basis. The purpose of the derivatives concept release was to elicit public input on a variety of regulatory issues raised by funds’ use of derivatives, including valuation, diversification and leverage limitations. 

The staff is now analyzing the feedback on the concept release to assess whether, and if so how, the mutual fund and investment company regulatory regimes should be revised to adequately account for the role of derivatives and incorporate more targeted requirements.


Having just gone through our priorities list, it feels a little daunting.  But it is important work and these are issues that must be tackled. 

In addition, neither Norm Champ nor I would not want to leave you with the misimpression that rulemaking is all we do.  The reality is far from it.  We have numerous staff devoted to reviewing disclosure; answering investor and industry questions; helping to shape enforcement cases and examination priorities; analyzing requests for exemptive relief and no-action guidance.  It is this entire body of work that makes the SEC an effective regulator. 

And as Director of the Division of Investment Management, Norm Champ has been committed to continuous improvement in all phases of the Division’s work – not just the rulemaking phase.  Norm and I are hopeful, however, that the remarks today showed the benefit of a coordinated and thorough analysis of potential policy initiatives.  And we further hope that our approach leads to effective results and achievable goals. 

We look forward to the challenging work we have ahead of us.  And we look forward to a continued dialogue with our stakeholders:  investors; taxpayers; industry leaders and, of course, legal practitioners such as yourselves.

Thank you.

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