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SEC’s Norm Champ on Risk Monitoring, Rulemaking Priorities, and Industry Guidance

In his keynote address at the Mutual Fund and Investment Management Conference, Director of the SEC’s Division of Investment Management Norm Champ discussed the Division’s risk monitoring efforts, outlined its rulemaking priorities, and discussed the staff’s efforts to communicate with the industry.

Mr. Champ discussed the Division’s Risk and Examinations Office (REO).  He explained that the office is staffed with analysts with quantitative backgrounds, examiners, lawyers, and accountants and is charged with ongoing financial analysis of the investment management industry.  REO’s focus is on “strategically important” advisers and funds.  He noted that the enforcement action against Ambassador Capital Management was a result of REO’s ongoing analysis of money market fund data.  Mr. Champ also discussed REO’s examination program saying that while REO can perform its own examinations with to gather information to inform the Division’s policy-making, it will join exams conducted by the Office of Compliance Inspections and Examinations when possible.

Mr. Champ also outlined the Division’s rulemaking priorities.  He reiterated a statement by SEC Chair White that money fund reform is a “critical priority for the Commission in the relatively near term in 2014.”  In addition to money market funds, Mr. Champ identified information reporting, variable annuity disclosure, and target date funds as other rulemaking priorities for the Division.

Mr. Champ discussed the Staff Guidance Updates that the Division began in 2013.  He stated that he viewed the guidance updates as a “vehicle for enhancing our communications with the public and addressing a range of disclosure, regulatory, and compliance matters by setting out the staff’s view of a particular matter in a time and transparent way.”  Mr. Champ also discussed the staff’s efforts to learn from the industry, highlighting his meetings with senior management at funds and advisers as well as meetings with fund boards.  He noted that these meetings had provided helpful information to the staff regarding the identification and management of risk.  He shared that the staff had discussed the challenges funds and advisers face with regard to cybersecurity.  In discussing the obligations of funds and advisers in this area, he said

The Division believes that funds and investment advisers should identify their respective obligations under the federal securities laws and assess the impact of a potential cyber attack on these obligations. For example, IM staff would expect that the compliance policies and procedures of investment advisers and funds would focus on Commission rules, such as Regulations S-P and S-ID, which address data protection and identity theft, including service provider oversight in these areas. Appropriate planning to address cyber security and a rapid response capability may assist funds and investment advisers in mitigating the impact of any such attacks and any related effects on fund investors and advisory clients, as well as complying with the federal securities laws.