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Remarks to PLI Investment Management Institute 2015

Dave Grim, Acting Director, Division of Investment Management

New York

March 5, 2015


Good morning everyone, and thank you, Paul, for that kind introduction.  I would also like to thank both you and Barry Barbash 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]

It is a privilege to be here today to deliver the keynote address at this important conference on regulatory and legislative issues affecting the asset management industry.  I have the honor of working with the nearly 200 smart and dedicated staff members of the Division of Investment Management, who are committed to carrying out the Division’s critical mission to protect investors, promote informed investment decisions, and facilitate appropriate innovation in investment products and services through the regulation of the asset management industry.  The Division's tremendous personnel are located across the country in Washington, DC, New York, Philadelphia, Fort Worth and San Francisco, and I am pleased to be joined at this conference by one of the Division’s very knowledgeable members; Bill Kotapish, Assistant Director in our Disclosure Review Office, who will take part tomorrow in a panel on developments in insurance products.  As I will discuss in depth shortly, today I am going to focus on the history of three of the Commission's 2015 priorities.  It is apropos that we are joined by three former Directors of the Division of Investment Management who all played an integral role in the history of the Division - their tenures representing over 13 years of leadership. 

Today I want to touch upon some initiatives we are very excited about, and to which the Division will be devoting a lot of attention throughout the year.  More specifically, my remarks outline in more detail a plan to enhance and strengthen the Commission's regulatory programs in response to an evolving asset management landscape that Chair White announced in a speech last December.[2]  As Chair White said, over the years our asset management regulatory program has grown and adapted, guided by the Commission's mission, to address the ever-evolving markets and the challenges that evolution presents.  In keeping with this growth and adaptation, the staff has been developing three sets of recommendations to help ensure that the Commission’s regulatory program addresses the increasingly complex portfolio composition and operations of today’s asset management industry.  The first of these recommendations seeks to modernize and enhance data reporting for both funds and investment advisers.  The second set would require 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 in mutual funds and ETFs.  The third initiative focuses on planning for the impact on investors of market stress events or when an adviser is no longer able to serve its clients.

Today, I plan to discuss the modernized and enhanced data reporting, derivatives, and liquidity rulemaking initiatives through a historical lens as they have applied to registered investment companies.  Tomorrow, at an Investment Advisers Association Compliance Conference, I plan to discuss how the issues underlying some of the Chair's initiatives have impacted investment advisers.  I hope this approach will help you better understand some of the priorities and goals for the Division for 2015 and beyond.

Enhanced Data Reporting

The modern-day SEC is an agency that increasingly relies on technology and specialized expertise. The innovative use of data and analytical tools contributes to the staff’s ability to make better and more informed policy recommendations and enhances our investor protection efforts.  One way to further this goal is to modernize our collection of data.  

The Commission and staff have long recognized the importance of collecting useful data on the financial service entities we regulate.  We have historically acted to modernize our forms and the manner in which information is filed with the Commission and disclosed to the public in order to keep up with changes in the industry and technology.  For example, in 1985, the Commission replaced five different reporting forms with Form N-SAR[3], which was designed to require reporting of data in a structured manner so that the Commission could construct a comprehensive database of information about funds.[4]

The Commission had several reasons to modernize the reporting regime for mutual funds at the time Form N-SAR was proposed.[5]  For example, the Commission proposed creating this new Form in order to assist staff evaluation of fund information and to increase the efficacy of the information collected by the Commission at that time because of changes in the mutual fund industry which had occurred over time.[6]  The Commission created one new form that included information that was useful and relevant to current and projected needs and that could be analyzed by staff.[7]

Another example of the Commission acting to modernize our forms and the way data is collected is the 2003 amendments to Forms N-CSR and N-Q regarding portfolio holdings disclosure.  As the Commission stated when proposing the changes, they were intended to improve the information disclosed to investors about a fund's investments by enhancing the information provided in reports to shareholders about a fund's portfolio holdings.[8]

The Commission currently collects information from funds in many ways, improvements to which the staff is currently evaluating to recommend to the Commission.  As I mentioned earlier, the Commission collects census-type information on management investment companies and UITs on reports on Form N-SAR.[9]  The form requires that funds report a wide variety of information to the Commission, including information relating to the fund’s organization, service providers, fees and expenses, portfolio strategies and investments, portfolio transactions, and share transactions.  Funds generally must file reports on Form N-SAR semi-annually. 

The staff is considering ways to update the basic census information reported on Form N-SAR to reflect new market developments, products, investment practices or risks.  In the years since 1985, the fund industry has created new products and implemented new investment strategies to meet the demands of investors.  For example, exchange-traded funds did not exist when Form N-SAR was created.  ETFs emerged in the 1990s and have grown significantly since then.[10]  In order to adapt to the ever-evolving fund industry, the staff is considering what data to collect that could improve its ability to carry our regulatory functions such as risk monitoring and analysis of the industry.  Staff also is considering ways to capitalize on new technologies and update the MS DOS-based filing platform on which funds report this critical information. 

Funds[11] also report their complete portfolio holdings information to the Commission on a quarterly basis on two forms that I referred to earlier – Form N-CSR and Form N-Q.[12]  Portfolio information submitted on Forms N-CSR and N-Q is used by the Commission for its regulatory, disclosure review, inspection, and policymaking roles[13].  The information provided in these forms, and frequency in which the information is provided, is also intended to provide investors with more meaningful information, and allow investors to make more informed investment decisions[14]

The staff is considering ways to improve the information reported on these forms for analysis both of individual funds and across multiple funds, increased transparency of how funds are implementing their investment strategies and to help staff assess the adequacy of a fund’s disclosures in its registration statement, as well as to enhance the ability of the Commission and investors to better understand the risks funds face.  The staff is also considering ways to standardize the information currently required to be reported regarding certain investments, such as derivatives (for example, swaps and forwards) and securities lending by funds, a practice which is done by approximately a quarter of funds.[15]

The Commission and staff have benefitted greatly from recent reporting requirements that employ enhanced reporting.  Enhanced reporting facilitates our oversight of funds and assists staff in monitoring efforts.  For example, since December 2010, money market funds have filed monthly reports on Form N-MFP with the Commission containing organized data formats relating to portfolio holdings.  So far, we have received over 34,000 filings.  Data from these reports have been used extensively by staff to inform policy and rulemaking, and have assisted Commission staff in examination, monitoring and investor protection efforts.  During the four years we have been receiving the data, the staff has been able to answer current questions in real time about the money market fund industry such as how much exposure did money market funds have to banks in a certain geographic region or country or what percent of money market fund assets were invested in a certain type of security.  Just two weeks ago, we began publishing some summary trend data based on the information we get from Form N-MFP that we hope the public will find useful when analyzing money market funds, in addition, fund advisers and possibly their boards will find it useful to compare their funds to broad averages. 

Leveraging the Commission's successful experience with money market funds under Form N-MFP, the staff believes that the collection of enhanced data for other investment companies can improve the effectiveness of the Commission’s oversight and examination programs by increasing the amount and usefulness of the information they report.  In addition, collecting certain data can meaningfully help the Commission better understand a fund’s risk exposure and enhance risk monitoring efforts, particularly for those funds that use complex instruments or investment strategies.  It is my expectation that appropriate and responsible use of the enhanced data would increase the effectiveness of the Commission’s regulatory mission and result in greater investor protection. 

Portfolio Composition Risks Associated with Derivatives

The second rulemaking initiative I would like to discuss this morning from a historical perspective is the use of derivatives by investment companies.  Funds currently employ derivatives for a variety of purposes, including to increase leverage to boost returns, gain access to certain markets, achieve greater transaction efficiency, and hedge interest rate, credit, and other risks.  Derivatives can raise portfolio composition risks and issues specifically addressed by the Investment Company Act.  A fund that invests in derivatives must consider the leverage limitations of section 18 of the Act, which governs the extent to which a fund may issue “senior securities.”[16]  Section 18, in part, protects investors against the potentially adverse effects of a fund's use of excessive leverage and limits of the issuance of “senior securities.”  Some of the concerns intended to be addressed by this provision of the Act were: (1) potential abuse of the purchasers of senior securities;[17] (2) excessive borrowing and the issuance of excessive amounts of senior securities by funds;[18] and (3) funds operating without adequate assets and reserves.[19]

The regulation of the use of derivatives by funds has a long and complex history, since section 18 of the Act does not directly address the use of derivatives by funds.  As former Division Director, Buddy Donohue, once said the Investment Company Act truly contemplated a different world.[20]

Citing dramatic growth in the volume and complexity of derivatives transactions and funds’ increased use of derivatives, the Commission issued its Concept Release on the Use of Derivatives by Registered Investment Companies in August 2011.[21]  In the Concept Release the Commission recognized that many derivatives transactions present both benefits and risks associated with leverage.  The Concept Release discussed the limitations on senior securities imposed by the Act as set forth in the Commission's 1979 Release 10666[22] in which it addressed the applicability of section 18 to certain financial transactions[23] that create indebtedness.  Following the Commission's issuance of Release 10666, the staff has addressed a number of issues relating to derivatives on a case-by-case basis.  We have issued almost thirty no-action letters and responded to numerous additional questions regarding the application of Section 18 and Release 10666 to derivatives transactions.  The Concept Release summarized this related Commission and staff guidance, discussed certain alternative approaches and highlighted issues for comment.  Some of the questions the Commission asked included:

  • Does the current approach of segregating assets adequately address the investor protection purposes and concerns underlying section 18 of the Act?
  • What is the appropriate limitation on the use of leverage by funds that balances the goals of protecting investors and facilitating appropriate innovation in the fund industry?

In the Concept Release the Commission stated that it wished to take a more comprehensive and systematic approach to derivatives-related issued under the Investment Company Act.  The staff has worked hard to study and analyze the comments we received during the comment period from the requests for comment contained in the Concept Release. 

In addition to the questions I mentioned earlier, the staff is also now considering whether funds should be required to establish broad risk management programs to address risks related to their derivatives use.

Portfolio Composition Risks Associated with Liquidity

The third rulemaking initiative that I would like to discuss today from a historical perspective is the topic of liquidity.  A key characteristic of mutual funds is that they are generally obligated to satisfy investor redemption requests within seven days of the request.[24]  In that manner, mutual funds should maintain a high degree of liquidity to assure those portfolio securities and other assets can be sold, and the proceeds used to satisfy redemptions in a timely manner. 

The interpretation of the level of liquidity a fund should maintain in its portfolio composition has evolved in the many years since 1940.  For example, in 1969, the Commission stated that a prudent limit on a fund's illiquid securities holdings would be ten percent.[25]  Over two decades later, Commission guidelines were adopted that stated open-end funds (other than money market funds) generally were not permitted to hold no more than fifteen percent of their net assets in illiquid securities and other illiquid assets.[26]  It has been many years since the Commission has revisited the liquidity management of mutual funds.  The staff is considering recommending a new comprehensive approach to the management of the liquidity risks associated with fund portfolio composition. 

In its works on a recommendation to the Commission to enhance the liquidity management of mutual funds, the staff is focused on the redemption rights of the investors of such funds.  Issues to be considered include, among other things, enhancing investment companies' management of liquidity risk and updating liquidity standards and disclosures of liquidity risks.  Such changes could better protect investors and provide better transparency about liquidity risks associated with various funds.


2015 is an important year for the Division of Investment Management.  This year marks the 75th anniversary of both the Investment Company Act and the Investment Advisers Act. 

Later this year, we will celebrate this anniversary with a day of roundtables and dialogue, including opportunities to hear from industry pioneers, former regulators and distinguished academics.  We are still in the early stages of planning, but we hope that you will be able to join us for this exciting event.

As I said earlier, Chair White recently announced several rulemaking initiatives for the Division of Investment Management, which will address the increasingly complex portfolio composition and operations of today's asset management industry.  This morning I have given you a brief historical perspective on data reporting, derivatives, and liquidity as they relate to investment companies.  Tomorrow, at the Investment Adviser Compliance Conference, I will address similar issues as they relate to investment advisers.

As Chair White noted last December, President Roosevelt rightly heralded the Investment Company Act and Investment Advisers Act as milestones in the “vigorous program…to protect the investor.”[27]  In this spirit, we are continuing to assess the evolving activities of the asset management industry, while simultaneously balancing the protection of investors with the principle of risk-reward which is at the heart of our capital markets.  By ensuring that we are informed through the collection of useful and enhanced data, addressing the risks of modern portfolio composition, and anticipating and planning for uncertainty, we are continuing to give life to our mission of protecting investors, promoting informed investment decisions, and facilitating appropriate innovation.[28]

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

[1] I would like to thank my colleagues, Tyler Kirk and Rich Rodgers, for providing invaluable assistance in preparing these remarks. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

[2] See Mary Jo White, Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry (Dec. 11, 2014), available at (“Chair White 12/11/14 Speech”).

[3] Form N-SAR is essentially an amalgamation of legacy forms that originated as far back as the 1950s.  Forms N-1R, N-30A-2, N-30A-3, N-5R, and 2-MD were annual reporting forms filed by investment companies to provide information to the Commission on various topics.

[4] See Semi-Annual Report Form for Registered Investment Companies, Release No. 34-21633 (Jan. 4, 1985) [50 FR 1442 (Jan. 11, 1985)] (“Form N-SAR Adopting Release”).  Reports on Form N-SAR are publicly available on the Commission’s EDGAR website.     

[5] Semi-Annual Report Form for Registered Investment Companies, Release No. 34-21208 (Aug. 6, 1984) [49 FR 32370 (Aug. 14, 1984)] (“N-SAR Proposing Release”).

[6] N-SAR Proposing Release at pp. 3-5.

[7] N-SAR Proposing Release at p. 10.

[8] N-SAR Proposing Release; Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, Release No. 33-8164 (Dec. 18, 2002) available at (“N-Q and N-CSR Proposing Release”).

[9] See rule 30b1-1 under the Investment Company Act.

[10] Chair White 12/11/14 Speech.

[11] Certain fund reporting requirements do not apply to UITs and SBICs.  See, e.g., rules 30b1-5 and 30b2-1 under the Investment Company Act.

[12] Funds certify their portfolio holdings information for the first and third fiscal quarters on Form N-Q within 60 days after the quarter end.  Funds transmit their annual and semi-annual shareholder reports (which generally include the fund’s complete portfolio holdings for the second and fourth quarters as part of the financial statements included in such reports) to their shareholders up to 60 days after the close of the reporting period, and certify those reports on Form N-CSR with the Commission within 10 days thereafter.

[13] Form N-Q at p. 1; Form N-CSR at p. 1.

[14] N-Q and N-CSR Proposing Release; Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, Release No. 33-8393 (May 10, 2004), available at (adopting release).

[15] Chair White 12/11/14 Speech.

[16] See sections 18(a)(1) and 18(f)(1) of the Investment Company Act. See also Securities Trading Practices of Registered Investment Companies, Investment Company Act Release No. 10666 (Apr. 18, 1979) [44 FR 25128 (Apr. 27, 1979)] (“Release 10666”); Registered Investment Company Use of Senior Securities–Select Bibliography (“Senior Security Bibliography”), available at (prepared by the staff). 

[17] See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Committee on Banking and Currency, 76th Cong., 3d Sess., pt. 1, 265-78 (1940) (“Senate Hearings”).

[18] See section 1(b)(7) of the Investment Company Act. See also, e.g., Release 10666, supra note 10, at n. 8.

[19] See section 1(b)(8) of the Investment Company Act; Release 10666, supra note 10, at n.8.

[20] Andrew J. Donohue, Keynote Address at the ALI-ABA Compliance Conference (June 3, 2010), available at

[21] Use of Derivatives by Registered Investment Companies Under the Investment Company Act of 1940, Investment Company Act Release No. 29776 (Aug. 31, 2011) (“Concept Release”), available at

[22] Release 10666.

[23] The financial transactions discussed by the Commission in Release 10666 include reverse repurchase agreements, firm commitment agreements and standby commitment agreements. 

[24] See section 22(e) of the Investment Company Act.

[25] See Statement Regarding ‘Restricted Securities', Investment Company Act Release No. 5847 (Oct. 21, 1969), available at

[26] See Exchange-Traded Funds, Release No. 33-8901 at n.34 (Mar. 11, 2008) [73 FR 14618 (Mar. 18, 2008)] (proposing release), available at

[27] Franklin D. Roosevelt, Statement on Signing Two Statutes to Protect Investors (Aug. 23, 1940), available at

[28] The Division of Investment Management works to protect investors; promote informed investment decisions; and facilitate appropriate innovation in investment products and services through regulating the asset management industry.

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