In an address at the 2016 PLI Investment Management Institute, Director Grim, discussed the Division’s focus on rules concerning exchange-traded funds, improving the effectiveness of disclosure and developing guidance and policy to support the oversight function of fund boards.
Director Grim reviewed developments in the ETF industry to indicate that the Investment Management Division “[has] been thinking a lot about ETFs and the significant role they play in the marketplace.” He noted that the SEC has incorporated ETFs into several recent rule proposals in an effort to address the increasingly complex portfolios and operations of mutual funds and ETFs. He mentioned the rulemaking proposal from May 2015 that would require more tailored data from ETFs, and pointed out that the SEC had included ETFs in its recent proposals to implement liquidity risk management programs, to enhance disclosure regarding fund liquidity and redemption practices and to limit the use of derivatives in registered funds.
The Director briefly spoke about the importance of disclosure and reporting in the securities industry. He reviewed the SEC’s proposed reporting forms, N-PORT and N-CEN, noting the important work data collected from these forms would allow the SEC to perform.
Finally, Director Grim discussed the role and responsibilities of fund boards. According to the Director, the role of a fund director is the critical job of oversight, which does not mean day-to-day management. He noted that directors overly burdened with management functions cannot effectively serve in their intended capacities.
The Director called the recent staff guidance updates on fund distribution and sub-accounting fees a “prime example” of the staff’s focus on providing directors with tools necessary to effectively oversee funds. He noted that the update on sub-accounting fees provided directors with the staff’s view “not only on the appropriate process a board should have in place to properly evaluate these fees, but also the responsibilities of a fund’s adviser and other service providers to provide sufficient information to boards of the overall picture of intermediary distribution and servicing arrangements for the funds.”
Director Grim also discussed the recent rulemaking initiatives regarding liquidity risk management and the use of derivatives, noting that they aimed to enhance the oversight function of the board. While the liquidity proposal would “require a fund’s board to approve a liquidity risk management program,” the fund’s adviser would ensure the day-to-day administration of the program. Additionally, under the derivatives proposal, the board would approve the portfolio limitation with which a fund will comply and the policies and procedures to determine risk-based coverage. For funds that use derivatives to a greater extent, “the rule would require the board to approve a risk management program and designate a risk manager to oversee that program.”
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