The Securities and Exchange Commission is working on a new proposed rule to require large investment advisors and investment companies to perform stress testing, according to Andrew “Buddy” Donohue, the agency’s chief of staff.
During a recent speech at the InvestoRegulation Conference in London, Donohue noted the agency’s release for comment on June 28 its plan to require investment advisors to implement business continuity and transition plans.
Karen Barr, president and CEO of the Investment Adviser Association, said the upcoming stress test rule, while not imminent, is a Dodd-Frank mandated rule that the agency has been working on for some time. “We’ve long suspected that it would be the last of the five core or prime rulemaking initiatives on asset management” that SEC Chairwoman Mary Jo White announced in December 2014, adding that she’s not ”aware of any of the details of the proposal.”
David Tittsworth, the former head of IAA who’s now of counsel with Ropes & Gray in Washington, added that Section 165(i) of the Dodd-Frank Act requires certain nonbank financial companies to conduct semiannual stress tests as prescribed by the SEC in coordination with the Fed. An estimated 300 firms would be subject to such stress tests, he says.
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While White has consistently included stress testing regulations in her list of investment management rulemaking priorities, Tittsworth noted, SEC staff “have expressed concerns about whether such tests are appropriate for nonbank entities.”
For instance, at a conference sponsored by the Financial Stability Oversight Council and the Office of Financial Research in February, the SEC’s chief economist, Mark Flannery, was quoted as saying: “There’s a problem that’s really got us stuck, which is what does it mean to stress test a mutual fund … The parallel to bank stress tests is really extremely misleading.”
The SEC’s Office of Compliance Inspections and Examinations is also building on what Donohue said has been a “successful” Cybersecurity Examination Initiative launched in 2015 that continues to focus on cybersecurity compliance and controls.