SEC will step up information gathering from mutual fund industry

Commission is developing rule proposal to strengthen industry data received, official says

Mar 17, 2014 @ 2:11 pm

By Mark Schoeff Jr.

Norm Champ, director of the SEC Division of Investment Management
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Norm Champ, director of the SEC Division of Investment Management

The Securities and Exchange Commission is developing a rule proposal that would strengthen its ability to monitor risks associated with mutual funds.

The rule would improve the data the agency receives from mutual funds, closed-end funds and exchange-traded funds, said Norm Champ, director of the SEC Division of Investment Management.

“We are undertaking an initiative to develop a recommendation that would modernize and streamline the information that funds are reporting to the commission to give us more timely and useful information about fund operations and portfolio holdings,” he told the audience Monday at the Investment Company Institute's Mutual Fund and Investment Management Conference in Orlando, Fla.

By improving the quality and scope of the information that it collects about money market funds, the SEC was able to file a case in November against Ambassador Capital Management, which the commission charged with making false statements about the credit risk associated with funds in its portfolio.

The SEC is seeking similar advances in overseeing the rest of the sector.

“We would like to look at the same things with mutual funds,” Mr. Champ said during an interview on the sidelines of the conference.

The SEC's project to monitor potential market risk posed by mutual funds is preferable to the Financial Stability Oversight Council designating big fund companies, such as Fidelity Investments, as systemically important, ICI President Paul Schott Stevens said during a speech prior to Mr. Champ's appearance.

The systemically important label likely would bring higher capital requirements that result in higher costs for investors, Mr. Stevens said.

“The Institute welcomes efforts by the SEC to improve its ability to address systemic risk,” Mr. Stevens said.

While the SEC gathers rich background about money market funds and private funds, it has lagged when it comes to obtaining electronic data on registered investment companies.

The SEC is seeking similar advances in overseeing the rest of the sector.

“We would like to look at the same things with mutual funds,” Mr. Champ said in an interview.

The SEC's project to monitor potential market risk posed by mutual funds is preferable to the Financial Stability Oversight Council designating big fund companies, such as Fidelity, as systemically important, ICI President Paul Schott Stevens said in a speech prior to Mr. Champ's appearance.

The systemically important label likely would bring higher capital requirements that result in higher costs for investors, Mr. Stevens said.

“The institute welcomes efforts by the SEC to improve its ability to address systemic risk,” he said.

Although the SEC has gathered rich background about money market funds and private funds, it has lagged when it comes to obtaining electronic data on registered investment companies.

“It really is information they need,” Andrew Donohue, a former director of the SEC Division of Investment Management and now a managing director and associate general counsel at The Goldman Sachs Group Inc., said during an interview at the ICI conference.

Investment companies file portfolio information through a clunky process based on a computer operating system from a generation ago.

“One thing I can tell you that is not under consideration is continuing to have the form filed in a DOS format,” Mr. Champ told the ICI audience.

Instead, the information would be presented in a way that allows it to be searched easily, according to Diane Blizzard, associate director for rule making in the SEC Division of Investment Management.

“This would give us an ability to look at trends and develop them over asset classes [and] types of funds in the industry as a whole,” she during a panel discussion at the ICI conference.

Industry participants on Ms. Blizzard's panel expressed concern about competitors being able to divine a fund's investment strategy from its filings with the SEC, a problem known as “front-running.”

The SEC would address that problem in the risk-monitoring rule, she said.

“We are talking about different ways we can perhaps deal with that,” Ms. Blizzard said. “Maybe we don't provide the disclosure publicly as often as we get it.”

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