By Andrew Ackerman
NEW YORK--Securities and Exchange Commission Chairman Mary Jo
White announced a sweeping set of initiatives Thursday to address
potential risks posed by the $60-plus trillion asset-management
industry, including steps to tighten restrictions on mutual funds
and other firms.
Among the most significant ideas is a plan that would likely
cause funds to curb their use of risky derivatives to boost
returns. The idea could target some of the hottest and
most-controversial investments offered to the public, including
so-called alternative mutual funds.
Ms. White said the agency also would take steps to eliminate
existing "gaps" in the data the agency collects from the industry,
requiring firms like Fidelity Investments and BlackRock Inc. to
give regulators more information about their portfolio holdings and
to conduct stress tests to determine how they would weather
economic shocks.
"The financial crisis only underscored the importance of the
careful management of risk by funds and their advisers," Ms. White
said, speaking at a conference in Manhattan at a conference
sponsored by the New York Times.
The rules under discussion, previously reported by The Wall
Street Journal, are somewhat similar to postcrisis requirements put
in place for big banks and other large financial institutions that
regulators believe could pose a risk to the financial system and
broader economy if they were to collapse. They come amid a broad
debate in Washington about whether the asset-management industry is
vulnerable to stresses, such as widespread investor redemptions,
that could roil markets and destabilize the financial system.
The bulk of the asset-management industry--which includes mutual
funds, hedge funds and private-equity funds--has yet to be swept up
in many of the rules aimed at curbing systemic risks.
Ms. White said the agency's goals aren't to eliminate all risk
and said investment risk "is inherent in our capital markets." She
suggested the agency's work would be complemented by the Financial
Stability Oversight Council, a group of regulators chaired by
Treasury Secretary Jacob Lew that is also examining potentially
risky products and activities in the asset-management industry.
The comments come amid complaints from some SEC commissioners
that the agency's authority as the primary regulator of asset
managers is being undercut by the FSOC.
Efforts to curb fund use of derivatives stems from a review,
begun nearly five years ago, into whether mutual funds,
exchange-traded funds and other investment companies that use
derivatives need to establish additional protections for their
investors.
The agency is unlikely to impose an explicit cap on the leverage
created by a fund's use of derivatives, according to people
familiar with the initiatives. Instead, firms would have to develop
internal policies to better manage the risk of these products, and
would have to curb their use of derivatives if their funds are
found not to have enough securities that can be readily sold to
meet redemptions.
The rules could likely target alternative funds, which rely on
hedge fund-like strategies, including using derivatives, to
increase leverage and boost returns. They also could affect
"leveraged" exchange-traded funds, volatile investments that use
derivatives to double or even triple the daily performances of the
indexes they track.
Derivatives are contracts that allow financial firms and their
clients to hedge against risks or bet on an asset's value, but they
can contribute to a fund's volatility and be expensive to
maintain.
The potential new reporting requirements are aimed at giving the
agency a better handle on risk across companies' portfolios of
funds without having to request information from each fund as part
of an examination.
Ms. White said additional data would also help the agency better
understand the growth in the volume and complexity of derivatives
used by funds as well as provide more complete information about
securities lending in funds.
The consequences for a mutual-fund performing poorly on a stress
test remains an open question. While the results of the tests will
have to be reported publicly by law, the SEC doesn't have the
authority to prevent funds from rewarding shareholders with
dividends or stock buybacks, which can happen if a bank fails a
stress test.
The SEC aims to propose the measures sometime next year. The
five-member commission would have to vote on the rules, collect
comment on them, and sign off on them a second time before they
could go into effect.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
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