SEC assessment of mutual fund risk could lead to more disclosure

Questions abound in early stages of potential rulemaking to boost oversight

Sep 8, 2014 @ 1:46 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission has started to work on rules that could require more transparency about mutual fund portfolio holdings and limit their use of alternative investment strategies, according to a story in today's Wall Street Journal.

The agency is exploring the increasing use of derivatives and other hedging strategies in mutual funds to enhance their returns. Over the summer, it launched a sweep exam focused on alternative mutual funds that delves into liquidity, leverage and board oversight.

The SEC declined to comment.

The SEC's work appears to be the next step in determining whether a catastrophic event in the asset management industry could undermine the stability of the financial system.

The Financial Stability Oversight Council decided this summer not to designate large fund companies, such as Fidelity Investments or BlackRock Inc., as systemically important. But the FSOC did say it would look at activities and practices within the industry. SEC Chairman Mary Jo White is a member of the council, which is comprised of federal financial regulators.

“More transparency regarding the portfolios of [leveraged] funds is good for investors and their advisers,” said Niels Holch, executive director of the Coalition of Mutual Fund Investors. “I just hope they don't overreach and try to impose bank-like regulations on typical mutual funds that don't employ leverage, such as an equity or bond fund.”

New rules are not imminent, given the SEC rulemaking process can take years.

“The SEC is in extremely early stages of looking at these things,” said Scott Burns, director of global manager research at Morningstar. “It's this evolving complexity [of mutual funds] that's given the SEC reason to pause for a bit and [to] try to understand what's happening in the marketplace today.”

It's too early to tell whether SEC action could raise prices for risky funds, such as leveraged exchange-traded funds.

“More frequent disclosure of a portfolio should not be a costly exercise for a fund,” Mr. Holch said.

There's a possibility that some alternative funds could lose favor if the SEC follows up its sweep exams with enforcement.

“We're in an environment where the SEC has moved fairly quickly in bringing negligence-based enforcement actions,” said Joshua Deringer, a partner and head of the investment management practice at Drinker Biddle & Reath. Advisers “are wary of having their clients in products that are the subject of enforcement actions.”

The major trade group for the mutual fund industry, the Investment Company Institute, welcomes the SEC's review of asset managers and financial stability. The ICI had strenuously criticized the FSOC's deliberations over designating large asset management companies as systemically important, arguing that the body didn't have the regulatory expertise to make such a determination.

“Any risks that may arise in asset management are best addressed by the SEC, which has a highly successful track record of regulating funds and advisers under statutory authority for almost 75 years,” ICI President Paul Schott Stevens said in a statement.


What do you think?

View comments

Most watched


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print