SEC: Stress tests and transition planning is the key
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SEC: Stress tests and transition planning is the key 12 December 2014New York Reporter: Stephanie Palmer
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Regulations must evolve with the asset management industry, with more focus on stress-testing and enhanced data reporting, according to Mary Jo White, chair of the US Securities Exchange Commission (SEC).
Speaking at the New York Times DealBook Opportunities for Tomorrow conference at the new World Trade Centre in New York, White cited the fast growth and evolution of the American asset management industry.
She said: “We are now embarking on a new period of regulatory change, driven by long-term trends in the industry and the lessons of the financial crisis.”
The SEC is developing recommendations to modernise the data reporting process and enhance reporting for both finds and advisors, and to monitor industry developments and any compliance issues.
White said the current data reporting requirements have not kept up with the pace of change in the industry, and should be expanded and updated. She pointed out that the SEC cannot properly identify and address risks if they cannot monitor them, and suggested that even the most basic reporting should be updated.
The data collected could then be used for the SEC to examine priorities and assess possible risks to the industry.
The SEC is also considering mandatory stress-testing and recommending that firms introduce comprehensive transition planning in the case of major disruption in a business.
Clients’ assets do not belong to the advisor, and historically, advisors have been able to leave the market with minimal impact. White said, however: “If we have learned nothing else from the financial crisis, it is that we must test and plan for the worst.”
According to White, the introduction of clear transaction plans would benefit the investors and the market as a whole, and she suggested that mandatory stress-testing would help all market players to better understand the impact of stress events.
Under the Dodd-Frank Act, annual stress tests have been mandated for large funds and investment advisors, and the SEC is considering how to tailor these requirements to meet the asset management market.
White insisted that the aim was not to remove all risk from the market, saying: “Just as our regulatory program evolves, so too must our understanding of the balance that program strikes between reducing undue risks and preserving the principle of 'reward for risk' that is at the centre of our capital markets.”
In her speech, she also talked about enhancing the controls on risk of portfolio composition, considering ways to increase transparency around liquidity risks and the implementation of broad risk management programmes.
She said: “While the SEC’s regulation of asset management is strong and comprehensive, the source of that strength has been our willingness to take stock of our rules with a clear vision and implement the necessary changes to make effective regulation that fits current market realities.”
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