SEC Director Discusses Agency Priorities and Initiatives
Yoomi Lee | Bloomberg Law
Elieen P. Rominger, Director of the Securities and Exchange Commission’s (SEC) Division of Investment Management, spoke at the PLI Investment Management Institute 2012, regarding the SEC’s initiatives to (1) enhance its internal efficiencies and regulatory effectiveness, and (2) review the regulatory regime relating to funds’ use of derivatives.
Efficiency and Effectiveness
Rominger discussed the SEC’s progress on enhancing its internal efficiencies and regulatory effectiveness. In particular, she stated that the SEC seeks to align closely the way registrants function with developments in the securities markets, including new products and instructions. Accordingly, the SEC has created new offices, modified its policy making process, and hired experts in areas where necessary. For example, the SEC is modifying its policy making process by increasing the use of project teams in which subject matter experts are paired with experienced rule writers to develop and draft new regulations. The SEC also created a new private funds branch led by a seasoned hedge fund attorney to oversee the regulation of private fund advisers and the implementation of new Form PF.
Moreover, Rominger maintained that as the SEC focuses on facilitating internal efficiencies, it also must ensure that its existing rules are effective and remain so even years after adoption. She explained that SEC rules must be the result of “careful consideration” of empirical evidence, knowledge of investment and business practices, and feedback from investors and market participants.
Funds’ Use of Derivatives
Rominger also spoke about the SEC’s recent Concept Release on the use of derivatives by mutual funds, exchange-traded funds, and other funds regulated under the Investment Company Act of 1940 (Investment Company Act). The SEC is evaluating how funds’ derivative activities comply with the Investment Company Act and has solicited public comment to “enrich this review.” For more information see SEC Seeks Public Comment on Funds’ Use of Derivatives, Bloomberg Law Reports®—Securities Law, Vol. 5, No. 37 (Aug. 31, 2011).
Rominger identified the leverage that funds incur when using derivatives as a central issue in the Concept Release and comment letters. She explained that the Investment Company Act draws a bright line limiting leverage, generally out of concern for the holders of both the senior and junior securities of a fund. Additionally, the current approach is to segregate assets to cover a fund’s obligation in a derivative transaction. The Concept Release questioned whether this makes sense overall from a policy standpoint, and how it could be improved. A significant number of commenters expressed that funds should have greater flexibility to use derivatives and to determine the amount of assets that need to be segregated to cover their derivatives. Other commenters, however, were concerned about the extent of derivatives used by certain funds and the potential negative impact of broadening the use of derivatives. Rominger stated that the SEC is examining more closely whether funds should be given the ability to determine for themselves how to set their leverage limits with respect to derivatives.
Lastly, Rominger explained that there is a long list of relevant issues when it comes to derivatives in a fund’s portfolio, including leverage, valuation, diversification, and internal controls. Accordingly, the SEC will assess the costs and benefits of all potential measures that may be considered to address these issues, and it also will coordinate and obtain input from experts in the industry.
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