In his commentary (recent news section), David mentioned remarks given in a speech by Norm Champ, director of the SEC's Division of Investment Management, to the Securities Industry and Financial Markets Association, as briefly reported here:
http://www.investmentnews.com/article/20141029/FREE/141029914Presumably, this speech will be posted soon on the SEC website. In the meantime, I suspect it will have covered many of the same points that Mr. Champ made in speeches to other professional organizations earlier in the year. By coincidence, I just happened to have the June speech in my
MFO Working File already, and so I found and read the September speech this afternoon as well. I have pulled out some things from each to give you a flavor of what's inside, but there is much more, including pricing issues, conflicts of interest, expectations and additional fiduciary duties of BDs who decide to oversee these new contraptions, and some adumbration about compliance challenges that advisers may face re. liquidity, leverage, and risk management (and the transparent and timely reporting of such).
June Speech to Private Equity Forum
http://www.sec.gov/News/Speech/Detail/Speech/1370542253660#.VFK_j4dYVVU"Recently, investment strategies that have historically operated in the private fund space have started to appear in the mutual fund area. This morning I will discuss the growing use of alternative investment strategies by open-end mutual funds; a burgeoning industry that had over $300 billion in assets as of the end of May 2014, according to Enforcement’s Risk Analysis and Surveillance Team. [...] I will discuss three broad topics: (1) alternative mutual funds, (2) the potential benefits and risks associated with these funds, and (3) some new developments within the Commission and the Division regarding alternative mutual funds. [...] I would like to highlight today a few key ’40 Act issues that are raised .... I will offer some observations on how to approach the regulatory issues associated with valuation, liquidity, leverage and disclosure."
September Speech to Hedge Fund Management Forum
http://www.sec.gov/News/Speech/Detail/Speech/1370542916156"In contrast to private funds, mutual funds are subject to registration and regulation under the Investment Company Act and (in most cases) their shares are registered under the Securities Act of 1933, which means that they can be offered to retail investors. [...] many hedge fund advisers are becoming involved with alternative mutual funds, either as sub-advisers to funds launched by traditional registered investment company managers, or by launching their own registered investment companies. [...} alternative mutual funds present heightened risks in all of the areas that I just mentioned – compliance programs, conflicts of interest, valuation, portfolio management, and marketing."
"While fiduciary duties and disclosure are also key elements of the Investment Company Act, the Investment Company Act regime imposes many additional, substantive restrictions. For example, Section 206 of the Advisers Act [new laws governing private/hedge fund behaviors] permits an adviser (or an affiliate of an adviser) to engage in a principal transaction with a fund or other client, provided that the client consents to the specific transaction after receiving full disclosure of all material facts. By contrast, Section 17(a) of the Investment Company Act generally prohibits such transactions for a fund, not only with its adviser, but with any affiliate of the fund, or with any affiliate of an affiliate of a fund. Furthermore, Section 17(d) and Rule 17d-1 under the Investment Company Act generally prohibit an adviser to a registered fund, or any other affiliate or affiliate of an affiliate of a registered fund, from engaging as principal in any “joint enterprise or other joint arrangement or profit-sharing plan” in which the registered fund is a participant, without first obtaining an exemptive order from the Commission. The breadth of these provisions can capture many types of transactions and arrangements, and may present concerns for advisers who manage registered and private funds alongside each other."
"I encourage private fund advisers to proceed thoughtfully and cautiously before becoming advisers to registered funds. [...] a private fund adviser may need to make significant changes to its compliance program in order to take on a registered fund client. Merely “tacking on” new policies and procedures to the adviser’s existing program, without considering the overall impact to the adviser’s business model, may increase the risk of compliance weaknesses, deficiencies or violations."
Comments
"Although alternative mutual funds only accounted for 2.3% of the mutual fund market as of December 2013, the inflows into these funds in 2013 represented 32.4% of the inflows for the entire mutual fund industry, with almost $95 billion of inflows into alternative mutual funds in 2013. That is over five times more than the amount of inflows into alternative mutual funds in 2012.[19]"
That shows just how much demand there is for these funds.