At the 2019 ICI Securities Law Developments Conference, SEC Division of Investment Management ("Division") Director Dalia Blass requested fund industry engagement on (i) fund innovation, (ii) the SEC's derivatives proposal, (iii) affiliated securities lending and (iv) the fund disclosure regime.

Fund Innovation in Digital Assets and ETFs

Ms. Blass called for the fund industry to engage in a dialogue on issues presented by investments in digital assets.

Ms. Blass described several actions the SEC has taken regarding exchange-traded funds ("ETFs"), including:

  • adopting a new ETF rule to increase competition within the market and broaden investor choice;
  • authorizing the first actively-managed ETF model since 2008; and
  • publishing notices of intent to approve another four new actively-managed ETFs.

Ms. Blass noted that a registered closed-end internal fund with a bitcoin futures strategy will be launching shortly.

Modernization of Regulations

Ms. Blass emphasized a recent "comprehensive" proposal that would address funds' use of derivatives and leveraged funds. As previously covered, Proposed Rule 18f-4 under the Investment Company Act of 1940 would provide an exemption from Section 18 under the ICA for mutual funds, ETFs, registered closed-end funds and BDCs when entering into derivatives transactions. The proposal would create Rule 15l-2 under the Securities Exchange Act and Rule 211(h)-1 under the Investment Advisers Act in order to address sales practices with respect to leveraged or inverse funds and exchange-listed commodity or currency pools (a/k/a "leveraged investment vehicles").

Ms. Blass requested comments on whether the proposal:

  • provides the necessary information for boards to monitor derivatives use by a fund;
  • establishes an effective limit on leverage risk;
  • should include an asset segregation requirement; and
  • appropriately addresses risks posed by leveraged and inverse ETFs.

Affiliated Securities Lending

Ms. Blass stated that affiliated securities lending is a priority for the Division. She asked for input on how to address potential conflicts of interest with respect to such arrangements, such as:

  • how advisers and boards can assess the structure of a securities lending program on a fund-by-fund, asset class or complex-wide basis;
  • if the Division should consider factors that would require a mix of affiliated or unaffiliated agents;
  • what practices work best for conflict assessment and management; and
  • whether advisers and boards can access independent information on the performance of their securities lending agent and if additional disclosures would be helpful.

Fund Disclosure

On fund fees and foreign index risk disclosures, Ms. Blass requested feedback on whether (i) cost cuts being made in one area are being made up in another, and (ii) investors are able to understand fee disclosures.

Ms. Blass advised funds to consider the following:

  • risks associated with outdated information when considering whether to include a constituent in an index;
  • whether the index provider has access only to limited data;
  • the limitations of evaluating an index provider's due diligence process; and
  • the limitations of the "rights and remedies" available to the fund.

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