Thursday, November 10, 2016

IM Director Grim touts benefits of fund-regulation enhancements

By Amy Leisinger, J.D.

“October 13 was a great day for fund investors,” said Investment Management Director David Grim in recent remarks. The Commission adopted critical changes to modernize and enhance fund reporting and to strengthen liquidity risk management, and, now, the staff will have more information available to monitor the industry and identify risks, and investors will be better able to make informed decisions, he explained.

According to the director, current reporting requirements do not effectively address the complexity of information or enable the use of technology for analysis purposes. New Form N-PORT will require a fund to report portfolio-holdings information as of the close of the preceding month and the terms of derivatives investments and includes calculations that measure exposure to changing market conditions, he stated. In addition, Grim continued, amendments to Regulation S-X will require standardized, enhanced disclosure about derivatives in investment company financial statements to facilitate comparisons among funds. New annual reporting form, Form N-CEN, streamlines information reported to the Commission to reflect current needs, including disclosures as to whether underlying funds are offered as options under a variable annuity or variable life insurance contract and whether a unit investment trust is a separate account. The form will provide valuable information about separate accounts and the securities issued, he explained.

Grim also discussed the reforms to promote effective liquidity risk management and to reduce the risk that funds will not be able meet redemption obligations and mitigate dilution of non-redeeming shareholders’ interests. Funds will be required to establish a written liquidity risk management programs, he stated, and classify the liquidity of their portfolio holdings and publicly report aggregate liquidity profiles on a quarterly basis. In addition, the changes codified a 15-percent limit on purchases of illiquid assets and established a “highly liquid investment minimum” to ensure stability, Grim said. The new swing pricing tool will also aid funds in effectively allocating the costs of managing purchases and redemptions, he noted.

With regard to insurance products, Grim noted that insurers continue to move away from offerings of variable insurance contracts with guaranteed benefits and that the staff continues to see buyouts and exchanges that may not be beneficial for contract owners. The staff will diligently review disclosures on these offers for to ensure comprehensive risk disclosures, he said.

The director encouraged a continued dialog regarding the proposed regulation of the use of derivatives by registered investment companies and the alternative portfolio limitations designed to limit the amount of leverage that a fund may obtain through derivatives, as well as the asset-segregation requirements. Grim also highlighted the ongoing disclosure effectiveness initiative and the staff’s consideration of means by which to improve the content and delivery of fund prospectuses. “Effective fund disclosures are a pillar of the Investment Company Act’s investor protection framework, and I believe nowhere is the need for effective disclosure more acute than with respect to the various risks associated with funds’ investment policies,” he concluded.