Top SEC officials lay out plans with managers at conference

Top Securities and Exchange Commission officials shared their 2016 priorities and thoughts on controversial issues like third-party compliance reviews and a fiduciary rule with money managers gathered in Washington on March 10.

Attendees at the Investment Adviser Association's compliance conference heard from SEC officials building on priorities set by Chairwoman Mary Jo White that, for asset management, include monitoring and considering rules for liquidity and derivative-related risks, plus a push for more effective disclosure overall. Ms. White also has promised to continue lobbying fellow commissioners to produce a uniform fiduciary duty for money managers and broker-dealers.

IAA members are registered investment firms with a collective $16 trillion in assets under management for institutional and individual clients.

Many asset managers are bracing for the SEC to act on the idea of requiring third-party compliance reviews, to help boost the resource-strapped agency's examination efforts. The SEC now examines 10% of money managers, covering 30% of assets under management. With the addition of 100 more examiners by the end of 2016, that should rise to 12%, and the SEC's proposed 2017 budget could bring that to 14%.

SEC Commissioner Kara Stein said in an interview of IAA President and CEO Karen Barr during the conference that SEC staff members “haven't really brought a fully developed proposal yet; there is a lot of talk on Capitol Hill.”

David Grim, director of the division of investment management, told conference attendees that as his office studies whether to proceed with rules requiring third-party compliance reviews, it will focus on weighing costs and benefits. Marc Wyatt, director of the SEC's office of compliance inspections and examinations, said, “Anything that the commission is able to do to supplement — not supplant — what we do, is going to be welcome to us,” as SEC officials look for behavior representing the highest risk. While SEC exams are at a five-year high, and more resources are being shifted from broker-dealers to money managers, “I don't think it's going to get us there,” Mr. Wyatt said.

Neil Simon, IAA vice president for government relations, noted that the SEC could move forward on a third-party review proposal because it does not require congressional action, but fellow panelist Kenneth Berman, partner at Debevoise & Plimpton LLP in Washington and former associate director of the SEC investment management division, had doubts about the political, if not legal, viability. “There will undoubtedly be a very careful review of the SEC's authority,” Mr. Berman said. Fellow panelist Christine Carsman, senior vice president and deputy general counsel for Affiliated Managers Group, in Boston, said, “The cost considerations are real. This one would be a real absolute cost.”

Systemic risk and the SEC's role in the Financial Stability Oversight Council is also a priority, said Ms. Stein, who was a congressional aide during the financial crisis. “Having worked on the staff of the Senate Banking Committee, I feel very much that financial stability is now very much a part of every financial regulator's mission,” Ms. Stein said. “I think we are now in a position of thinking through where might there be another financial problem, because there is going to be another problem. ... I think it's a part of our mission now, and we all need to be focused on it.”

Mr. Berman told IAA attendees that money managers “should be interested in FSOC's concerns because they seem to have driven a large part of the (SEC) agenda in 2015 and that is expected to continue in 2016.”

That includes proposed rule-making on increased data collection, derivatives and liquidity, all of which include disclosure components. Although the SEC has the greatest expertise in these areas, “I think the concern is if the SEC doesn't address these, the FSOC will find some other way,” Mr. Berman said later in an interview.

SEC enforcement priorities for 2016 are broken down by registered investment companies, private funds and retail advisers, Anthony S. Kelly, co-chief of the enforcement division's asset management unit, told the group.

For investment companies, SEC enforcers are looking closely at valuation, conflicts of interest and governance, while private funds are scrutinized for valuation, conflicts of interest, and how fees and expenses are allocated. “On the private equity side, we'd expect to have more fees and expense cases as we move forward,” said Mr. Kelly, whose unit is also continuing to refine its aberrational performance data initiative that uses proprietary risk analytics to evaluate private fund returns with abnormal performance.

Mr. Kelly dismissed concerns that compliance officers at money management firms are being targeted. “We go out of our way to look at the facts and circumstances of each case,” he said.

Given some recent cases holding them personally liable, compliance officers at money management firms “are understandably concerned that they might have a target on their back,” Ms. Barr told Ms. Stein.

Mr. Wyatt of OCIE also sought to dispel the notion that the agency looks at only 10% of money manager activity. “There is a misperception among the industry that the other 90% go unnoticed,” when in practice SEC officials look at all sources of information before narrowing in on that 10% to examine, he said.

“No one manages a complex business such as ours by looking at one number.” OCIE's new office for risk and strategy, created to streamline risk assessment, market surveillance and quantitative analysis, “will lead our exam program's risk-based, data-driven and transparent approach to protecting investors,” Mr. Wyatt said.

While the Department of Labor is considered well ahead of the SEC when it comes to a new fiduciary standard, “the concept is a priority” of Ms. White, Mr. Grim said. “She thinks it is the right answer and wants to make that happen. It's a key risk for us, so we are going to continue to collect the data.” n