Monday, October 29, 2018

Director Blass focuses on key developments, encourages participation at ICI Securities Law Developments Conference

By Joanne Cursinella, J.D.

Dalia Blass, director of the Division of SEC’s Division of Investment Management, discussed three areas that her staff has been focused on during the last year: improving fund disclosure; fund use of derivatives; and staff guidance in her recent keynote address at the ICI Securities Law Developments Conference in Washington, D.C. Encouraging participation, she said that the Division values and uses the input of all interested parties.

Improving fund disclosure. The Division is seeking opportunities to improve the quality and usefulness of information that investors receive about funds and advisers, Blass said, and the approach it takes differs from other recent work on fund disclosure because it focuses on how information serves investors, not on how the Commission uses information. Division staff is “making every effort to connect directly with individuals and also to bring their views into the comment process,” she added. The efforts include a “feedback flier” that allows investors to submit comments without needing to review the entire rulemaking proposal or write a letter, and the new “Tell Us” website, which provides a portal for this feedback. So far, the Division has received 140 comments using the new fliers, Blass said.

“We have also seen glimpses of the future,” Blass claimed, as asset managers have given demonstrations of their “latest investor-facing technology and shared thoughts on what may come next.” Blass believes that asset managers and data aggregators, among others, have the potential to develop tools that layer, enrich, connect and analyze disclosure to meet investors “where they are.” The key question for the Division is whether changes in rules or forms would help unlock these opportunities for investors, she said.

In addition to informal outreach, the Division has worked with the Commission to take several concrete rulemaking steps, Blass pointed out, including the adoption of Rule 30e‑3, issuing a request for comment on the framework for fees that intermediaries charge to deliver disclosure documents, and proposing a short-form summary to explain the terms of an investor’s relationship with a broker-dealer or investment adviser. While this is a “good start” she said, she also pointed out that while the Division oversees a framework, it is not part of the investment relationship. She recommended that when it comes to fund disclosure, tell a clear story; write clearly and concisely; and engage with disclosure staff. “I also invite you to engage with staff on fund-specific questions,” Blass said.

Derivatives rulemaking. “We can, at least in my view, do better than the current guidance,” for funds and derivatives, Blass claimed. A few of the questions that the Division is now “grappling” with are: How should we think about leverage risk in a dynamic market? What role should risk management play? What role should asset segregation play? What are funds doing today? Are additional, risk-based buffers common? What role should these practices play in a rule?

Blass said that the Division welcomes any thoughts from sponsors, scholars, risk managers and others on these issues. So far, the staff has learned the most from simply hearing risk managers talk about current practice, Blass said, but “we are also open to creative and thoughtful ideas.”

Staff guidance. Statements of the staff are not statements of the Commission, and they do not have the force of law, Blass said. Last month, Chairman Clayton issued a statement about staff views pointing this out, Blass added. The chairman explained that all staff statements are nonbinding on the Commission and create no enforceable legal rights or obligations of the Commission or other parties.

The chairman also noted that the Division has been and will continue to review whether prior staff statements should be modified, rescinded, or supplemented in light of market or other developments, Blass added. As part of the review of prior statements, she said, the Division has withdrawn two staff letters issued in 2004 to proxy advisory firms.

The Division’s next steps in this process is to continue to review and assess prior staff statements, considering whether there need to be any changes. This is a priority for the Division, but will not be accomplished quickly, Blass said. In the meantime, the staff will continue to “advise and assist remain available to advise and assist just as we always have,” Blass assured.

Blass closed by reminding the audience that she only “touched on a small slice” of what the Division is doing and mentioned that the Division staff reviewed thousands of fund filings and exceptive requests; issued letters addressing protection of seniors, risk retention for BDCs, and board duties under affiliated transaction rules; reviewed fund board responsibilities generally; developed data analytic tools and conducted focused outreach on fund practices; worked on developing recommendations on advertising, valuation, ETFs, fund research, BDC and closed-end fund offering reform and liquidity disclosure; and engaged in dialogue with sponsors on crypto-asset funds.