SEC's White Vows to Get Tougher on Mutual Funds

White outlined three initiatives to put controls on portfolio composition and operational risks within asset management firms

Securities and Exchange Commission Chairwoman Mary Jo White says the Commission is taking a magnifying glass on the regulation of the asset management industry and mutual funds in particular, pointing out that in 2013, 57 million American households, or 46% of those households, are invested in one of the 10,000 U.S. mutual funds that hold more than $63 trillion of assets under management.

White spoke at the The New York Times DealBook Opportunities for Tomorrow Conference in New York on Thursday, where she paid special attention to the asset management industry, which she called “one of the agency’s most important responsibilities,” and more specifically controls on portfolio composition risks and operational risks within asset management firms. 

“The financial crisis only underscored the importance of the careful management of risk by funds and their advisors, including portfolio composition and operational risks in particular,” she said. Adding, “A broader set of proactive initiatives is required to help ensure that our regulatory program is fully addressing the increasingly complex portfolio composition and operations of today’s asset management industry.”

In her speech, White outlined three core initiatives that the SEC is working toward.

The first initiative, enhancing data reporting, will look at expanding and updating existing data requirements for both mutual funds and advisors. “The SEC’s ability to effectively identify and address risks in the asset management industry," she said, "is diminished without the ability to monitor for those risks at the fund level and across the entire industry.”

White suggested that current rules lack standardized reporting for many types of derivatives used by funds today, complete information about securities lending by funds and even basic census information that would allow the SEC to better monitor industry developments and potential compliance issues

The second initiative, enhancing controls on risks related to portfolio composition, would help the SEC “ensure that registered funds have controls in place that effectively identify and manage the risks of their current portfolio composition.” 

“Liquidity management and the use of derivatives in mutual funds and ETFs are two key areas of focus by the staff,” White said. “Inadequate controls in those areas can create significant risks for funds themselves and their investors, as well as raising questions about whether there could be a potential impact on the financial system as a whole.”

And White’s third initiative asks for improved transition planning and stress testing.

“We must take steps to ensure that firms have a plan for transitioning their clients’ assets when circumstances warrant,” White said. “If we have learned nothing else from the financial crisis, it is that we must test and plan for the worst.”

White said SEC staff is considering ways to implement the new requirements for annual stress testing by large investment advisors and large funds, as required by the Dodd-Frank Act.

White’s three initiatives are just a first step; she noted that “there is significant work to do before we have final rules in place.” She also mentioned all the other work the SEC has on its plate, including 

“We will be looking to investors and market participants to provide us their views, and I will be working closely with my fellow Commissioners to translate staff recommendations into Commission action.”

As the industry continues to grow – with White citing assets under management for most of the largest firms doubling since 2004 – the Commission's initiatives aim to put a focus on “regulating the risks arising from the portfolio composition and operations of investment advisors and funds.” 

The SEC's objective, she said, "is not to eliminate all risk. Far from it. Investment risk is inherent in our capital markets – it is the engine that gives life to new companies and provides opportunities for investors.”


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