Money Market Funds
Operations and Technology
SEC Chair White Affirms Agency Has Tools to Address Risks in Industry
By Rachel McTague
May 8, 2015
The U.S. Securities and Exchange Commission (SEC) has the tools it needs to address systemic risks to the extent they exist in the asset management industry, said SEC Chair Mary Jo White at the opening session on the final day of ICI’s annual General Membership Meeting (GMM). White also announced that David Grim—who had been serving as acting director of the SEC’s Division of Investment Management—has just been named director of the division. White said she is thrilled that Grim, a 20-year veteran of the SEC in the investment management area, is taking the reins at a time when the Commission is moving forward to implement proactive regulations for the industry.
Adaptable and Appropriate
White—the first career prosecutor and litigator to head the agency—has spoken at GMM every year since she was confirmed for the post a bit more than two years ago. As she did last year, she fielded wide-ranging questions from ICI President and CEO Paul Schott Stevens.
White said that under the 1940 Investment Company Act, the regulatory tools at the Commission’s disposal are adaptable, and appropriately so. The regulatory regime for funds has evolved over the years as the markets, risks, and products have evolved, she noted. Risk regulation by the SEC is driven by its core mission of protecting investors, overseeing and protecting the capital markets, and encouraging capital formation, White explained.
“We’re not about eliminating risk. We’re about eliminating excessive risk and systemic risks. And I think what the SEC needs to do even more...is really to assert that perspective,” she asserted. “Because that’s the core of what the SEC’s about. It’s its strength and it’s enormously important to the economy that that voice be heard, and be heard widely,” she said.
The Challenge of “One Size Fits All”
White also affirmed the Financial Stability Oversight Council’s “enormously important” responsibility to assess and address financial stability and systemic risk issues, as mandated by the Dodd-Frank Act. Nonetheless, she suggested that the tools that the Dodd-Frank Act gave to the council to carry out its job were built as “one size fits all”—which can present a challenge in the context of the council’s authority to designate systemically important financial institutions (SIFIs).
Tools provided by the Act may need to be adjusted in the asset management space, as has been done with respect to FSOC’s SIFI-designation process for insurance firms, White noted. In addition, she emphasized, that the assessment of whether a firm could be designated as a SIFI “doesn’t necessarily mean that it has to be or it should be designated.” She continued, “There are regulatory responses to those risks that make sense. Perhaps they have already been taken by the SEC. Perhaps they are being taken by the SEC.”
In global regulatory discussions, the SEC’s role “couldn’t be higher,” White told the gathering. SEC staff provides expertise and extensive support to the work streams and the committees of the Financial Stability Board (FSB) and the International Organization for Securities Commissions (IOSCO), she explained. In those organizations, the SEC—as a regulator exclusively of capital markets—is “the strongest voice” and best source of intelligence about the markets. All perspectives are needed, and because central bankers play a prominent role in these global regulatory bodies, the SEC’s voice is essential, she added. White also said it would be beneficial to add further capital markets perspective and participation in global regulation.
A Focus on Data Reporting, Liquidity Management, and Derivatives
Stevens and White discussed the rulemaking priorities in the areas of enhanced data reporting, liquidity management, and derivatives regulation for the fund industry, which she had outlined in a December speech. She echoed Stevens’ remark that the job of regulating the markets is never done, explaining that “the markets evolve, the risks evolve, and innovations evolve.” If anyone ever says that regulators have reached the optimal level for regulation of the markets, the regulators “wouldn’t be doing [their] job—that’s not the reality,” she said.
With respect to liquidity management, the SEC leader made the point that “enhancement of standards need to be brought forward,” including, for example, the definitions of “liquidity” and “illiquidity.” In addition, securities lending by funds, and more transparency of separately managed accounts, are areas of focus for the Commission.
Looking to Move on the Fiduciary Rule
Speaking about a recent proposal by the Department of Labor (DOL) to redefine the definition of “fiduciary” for providers of securities investment advice to retirement plan participants, White said the SEC has been providing technical assistance to the DOL. This effort is intended to help ensure that the SEC’s rulemaking to define fiduciary outside the retirement space, she said, will be consistent with the rule that DOL finalizes.
She reaffirmed her “personal view” that the commission should proceed with a rule that would impose a uniform fiduciary duty on investment advisers and broker-dealers, taking into account the parameters given in Dodd-Frank and the business model of brokerage firms. It should be a high standard, she said, and retail investors should understand the duty their adviser is operating under.
“The fiduciary standard would apply to investment advisers—but it isn’t a meaningful standard unless it is enforced,” she stressed. Thus, because of resources and budgetary challenges at the SEC, White said that the Commission is exploring a program that would enable it to use third-party examiners to help it oversee the more than 11,600 investment advisers it regulates. These third parties would not supplant the SEC’s examination staff, she explained, but supplement its efforts. “We’ve been looking at that gap for far too long. We have to close it,” White said. Despite leveraging technology in its efforts, the SEC staff currently can cover only about 10 percent of advisers in its examinations, she told Stevens.
Putting Cyber Threats at Top of Her List
White also spoke to Stevens about the Commission’s approach to addressing cyber threats in the industry, citing the agency’s newly published guidance on the issue and a newly announced compliance initiative by the SEC that will include cybersecurity as a focus. “It is the biggest systemic risk we have facing us,” White urged, noting that in the private and public sector, “everyone gets how high-level an issue this is.” Her advice for FSOC? “Put this at the top” when drafting its annual report, which is due out soon.
White also acknowledged that the SEC still is focused on developing a rule to help sponsors of exchange-traded funds (ETFs) avoid the complicated process of obtaining an SEC regulatory exemption as a preliminary step to launching a new ETF. However, she admitted, at the moment the Commission’s rulemaking priorities for asset management that she announced in December are front and center.
In summing up, she explained that the importance of the expertise and dedication of the SEC staff cannot be overstated. This, coupled with some structural changes and other improvements the Commission has made in the wake of the financial crisis, has contributed to tremendous progress on all fronts.
For other GMM highlights, please visit http://gmm.ici.org/gmm/2015/15_highlights.
Rachel McTague is a director in ICI’s Media Relations department.
TOPICS: Mutual FundBondsTreasuryEventsEuropeInterest RateShareholderFederal ReserveFinancial MarketsFinancial StabilityCybersecurityExchange-Traded FundsFund RegulationGMMInternationalGovernment Affairs
More Unfounded Speculation on Bond ETFs and Financial Stability
By Shelly Antoniewicz and Mike McNamee
April 13, 2015
A recent column in the Financial Times warns of “another accident in waiting” in the growth of fixed-income exchange-traded funds (ETFs)—described as “financial alchemy” that converts illiquid bonds into “baskets” that “trade moment to moment on the stock exchanges.” This “illusory” ETF liquidity will disappear, the author warns, when investors “want to move en masse, and quickly, when the going gets less good.”
Does Liquidity in ETFs Depend Solely on Authorized Participants?
By Shelly Antoniewicz and Jane Heinrichs
March 16, 2015
ICI recently conducted a survey of its members that sponsor exchange-traded funds (ETFs) to collect information on authorized participants (APs)—typically market makers or large institutional investors with an ETF trading desk that have entered into a legal contract with an ETF to create and redeem shares of the fund.
Simple Answers to the Federal Reserve’s Quandaries
By Mike McNamee
February 24, 2015
The Federal Reserve System can’t get past its perplexities on the role of mutual funds in financial stability. Time and again, the Fed’s governors, regional presidents, and staff return to the same hypothetical risks and speculative scenarios in which mutual funds somehow pose a threat to the financial system.
Plenty of Players Provide Liquidity for ETFs
By Shelly Antoniewicz
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A recent article in the Financial Times’ FT Alphaville blog (“Lies, Damned Lies, and Liquidity Expectations”) focused on a paper published by the Committee on the Global Financial System, an organization that monitors developments in global financial markets for central bank governors.
Bloomberg Ignores the Evidence on Bond ETFs
By Mike McNamee
September 26, 2014
In response to “Pimco ETF Probe Spotlighting $270 Billion Market Vexing FSB,” we posted the following comment on Bloomberg News’ website:
A Look Inside ETFs and ETF Trading
By Rochelle Antoniewicz and Jane Heinrichs
September 23, 2014
Investors in exchange-traded funds (ETFs) are trading shares with each other far more than they are turning to authorized participants to create or redeem shares.
Sizing Up Mutual Fund and ETF Investment in Emerging Markets
By Chris Plantier
August 18, 2014
In coming decades, emerging market (EM) economies will need substantial new capital to accompany and sustain their rapid growth.
ETFs Don’t Move the Market—Information Does
By Shelly Antoniewicz
March 11, 2014
There they go again.
IDC Paper Assists Boards in Oversight of ETFs
By Annette Capretta
October 19, 2012
The Independent Directors Council (IDC) has issued a new paper, Board Oversight of Exchange-Traded Funds in order to assist directors of exchange-traded funds (ETFs) in performing their oversight responsibilities. The demand for ETFs has grown markedly as investors—both institutional and retail—increasingly turn to ETFs as investment options in their portfolios. With the increase in demand, sponsors have offered more ETFs with a greater variety of investment objectives. Our paper also may be useful for directors who do not currently oversee ETFs but wish to be more familiar with a board’s oversight role, including those whose fund groups may currently invest in ETFs or intend to launch ETFs in the future.
Key Data Undercut Critics’ Arguments on ETFs and Intraday Volatility
By Rochelle Antoniewicz
April 19, 2012
Over the past year, several news stories have focused on stock market volatility, particularly the price swings that occur in the hour prior to the U.S. market’s 4:00 p.m. close. “What’s Behind That Wild Final Hour of Trading?” asked CNNMoney last November.
The (Dis)Connection Between ETFs and Market Volatility
By Rochelle Antoniewicz
February 23, 2012
In the past year, many commentators have charged that exchange-traded funds (ETFs) are responsible for driving stock market volatility to unprecedented extremes.
Proposal to Implement the Volcker Rule Raises Deep Concerns for U.S. Registered Funds
By Paul Schott Stevens
February 14, 2012
Congress enacted the provision of the Dodd-Frank Act known as the Volcker Rule to restrict banks from using their own resources to trade for purposes unrelated to serving clients—something known as “proprietary trading.”
ETF Basics: The Creation and Redemption Process and Why It Matters
By Mara Shreck and Shelly Antoniewicz
January 19, 2012
One benefit of exchange-traded funds (ETFs) is that they give investors access to a range of strategies and indexes, with the flexibility of transacting throughout the trading day at prices that typically approximate the value of the fund’s underlying portfolio. To see how ETFs accomplish this, one must understand how ETF shares are created and redeemed.
TOPICS: Exchange-Traded Funds
ICI Adds to Educational Resources on Exchange-Traded Funds
By Mike McNamee
December 16, 2011
ICI Adds to Educational Resources on Exchange-Traded Funds.
TOPICS: Exchange-Traded Funds
ICI Responds to Hearing on Excessive Speculation
By Stephanie Ortbals-Tibbs
November 3, 2011
ICI issued the following statement in response to today’s hearing, “Excessive Speculation and Compliance with the Dodd-Frank Act,” before the Senate’s Permanent Subcommittee on Investigations.
ICI Responds to Hearing on Exchange-Traded Funds
By Stephanie Ortbals-Tibbs
October 19, 2011
ICI issued the following statement in response to today’s hearing in the Senate Banking Subcommittee on Securities, Insurance, and Investment, “Market Microstructure: Examination of Exchange-Traded Funds.”