More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
"In determining the appropriate disclosure, a fund should consider the degree of economic exposure the derivatives create, in addition to the amount invested in the derivatives strategy," wrote Barry Miller, associate director in the SEC's Office of Legal and Disclosure. "This disclosure also should describe the purpose that the derivatives are intended to serve in the portfolio (e.g., hedging, speculation, or as a substitute for investing in conventional securities), and the extent to which derivatives are expected to be used."
Among the SEC's concerns about current disclosure statements is that information provided is too generic. Disclosures are "of limited usefulness" to investors, according to Miller's letter to the ICI, and fail to demonstrate how "the fund's investment adviser actually intends to manage the fund's portfolio and the consequent risks."
Furthermore, while some of these "generic disclosures" are limited in scope, others are too long or too technical, with details of potential derivative transactions and no indication of relevance to investment operations.
A typical derivative disclosure, Miller writes, states that the fund "will or may engage in derivative transactions," and lists all types of derivatives as possible investments. Disclosure statements may also be too generic about derivatives' purpose in the fund or the extent to which they will be used.
These same concerns extend to risk disclosures, which provide only a limited or generic explanation of risk, or overly-complex disclosures that "reduces its usefulness for investors."
"We are reviewing the SEC staff's letter on derivatives-related disclosures by investment companies," a spokesperson for ICI said. "We will work with our members to ensure that they understand and comply with their disclosure obligations."