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SEC eyeing new regulations for ETFs, fund disclosures

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WASHINGTON — Alarmed at ongoing disclosure issues and the potential risks associated with ETFs, the SEC is expanding its ongoing review of the asset management industry.

"The commission has already taken significant steps to modernize our registered fund disclosure regime," SEC Chair Mary Jo White said at the Investment Company Institute's general membership meeting. "But more is needed."

White said she has instructed her staff to determine how fund disclosure can improve. But disclosures, she added, "are only part of the current and future picture," and urged registrants to think more deeply about their "fiduciary decision-making."

Commission staff are also looking at ETFs with regard to possible liquidity and other issues, and with an eye toward potential new regulations, White said.

She cited the "flash crash" of 2010, and the extreme market volatility of Aug. 24, when many ETFs saw a precipitous drop in trading prices that far outpaced the value of their collected basket of holdings.

"The staff has been focused on analyzing these events and any broader implications they may have for how we regulate ETFs," she said. "They are also analyzing the role that authorized participants and market makers play in the operation and trading of ETFs and how much they impact the liquidity in the markets."

Additionally, White said that commission staffers are probing how broker-dealers are handling ETFs and the extent to which investors understand the risks and other salient features of the fast-growing product class, hinting that "further regulatory steps beyond additional disclosures may be needed to address some of these issues."

White said that the asset management industry, now totaling some $15 trillion in assets, is "of vital importance to investors," but emphasized the need for "dynamic and robust regulation" to establish safeguards against rampant risk and volatility, just as the commission moved to introduce new regulations aimed at limiting potential risks from runs in money market funds.

White's announcement of new regulatory initiatives follows on her comments from December 2014, when she put the industry on notice that she was initiating a multi-pronged review of the sector that would culminate in a new set of rules for fund companies.

Now, the SEC is in various stages of advancing regulations to overhaul asset managers' use of derivatives and ramp up the requirements for liquidity risk management and reporting. The agency is also currently developing recommendations for new rules that would mandate some funds and advisers to put in place transition plans and conduct annual stress tests.

On liquidity and derivatives, White said that she anticipates moving in short order "to promptly finalize these rules, which I expect to move forward on this year."

Cybersecurity and the supervision of third-party vendors continue to rank as high concerns as the SEC evaluates the asset management space. White noted that the volatility of Aug. 24 might have been contained if a service provider working with funds had been able to process net asset value calculations in a way that kept up with trading activity on that tumultuous day.

White reiterated her view that cybersecurity remains "one of the greatest risks facing the financial services industry," and called on asset managers — as she has with brokers and advisers — to ensure that they have appropriate policies and procedures to mitigate risk and respond to attacks.

White also stressed that asset managers and advisers need to think of disclosure as more than a mere compliance exercise. They need to work to bring to the surface — in an understandable format — the most relevant facts about a particular product to help clients to make an informed investment decision.

"You should be continuously reevaluating the purpose and value of all of your funds' disclosures. Avoid boilerplate and tailor your disclosure as appropriate for each fund. Ask yourselves regularly: What can I do to improve investors' understanding of the fund’s strategies, risks and costs? These features of your funds change continuously and so should your disclosures."

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