On October 29, Norm Champ, the director of the Securities and Exchange Commission’s Division of Investment Management, spoke before the SIFMA Complex Products Forum in New York. In the speech, Mr. Champ discussed SEC staff concerns regarding the adequacy and accuracy of alternative mutual fund disclosures to investors. The speech was the third since June that Mr. Champ has given to outline staff concerns with alternative mutual funds. On June 30, Mr. Champ spoke before the Practicing Law Institute (PLI) on the heightened risks faced by alternative mutual funds with respect to valuation, liquidity and leverage, and the role that fund boards play in the oversight and compliance programs of alternative mutual funds. On September 11, he spoke before a PLI Hedge Fund Management Seminar about the importance of a focus on compliance and the interests of investors for advisers launching alternative mutual funds.
In his October 29th remarks, Mr. Champ focused on the challenges of appropriately disclosing the actual strategies utilized by, and the heightened risks of, alternative mutual funds to retail investors. According to Mr. Champ, the SEC staff generally believes that all alternative investment strategy mutual funds (including Exchange Traded Funds) should regularly assess—in conjunction with each annual registration statement update—the accuracy and completeness of their strategy and risk disclosures.
Mr. Champ said that disclosure of principal investment strategies needs to be tailored to how a fund expects to be managed, and should address those strategies that the fund expects to be the most important means of achieving its objectives and that it anticipates will have a significant effect on its performance. The degree of economic exposure the alternative investment strategy creates, in addition to the amount invested in that strategy, is an important disclosure point.
Finally, Mr. Champ noted that the Division of Investment Management staff generally believes that an alternative mutual fund should assess on an ongoing basis the completeness and accuracy of alternative investments-related disclosures in its registration statement in light of its actual operations. Mr. Champ noted, “The staff has been reviewing data to compare the actual use of alternative investment strategies with what has been disclosed in fund disclosure documents.”
The October 29th speech also addressed the Division’s enhanced risk monitoring efforts in the asset management industry. The full text of Mr. Champ’s October 29th speech can be found here.