The Wall Street Journal (the “Journal”) has reported1 that the US Securities and Exchange Commission (“SEC”) is drafting proposed rules for the asset management industry that are designed to address the perceived risks posed by the industry to the financial system. These regulations (as detailed by the Journal) are in accordance with the Financial Stability Oversight Council’s decision to focus the regulatory effort on investment products and strategies, rather than on individual investment advisers. During a speech in February 2014, SEC Chair Mary Jo White identified the main goals for the forthcoming mutual fund regulations when she called for an “action plan” that would provide for “expanded stress testing, more robust data reporting, and increased oversight of the largest asset management firms.”2 More specifically, according to the Journal, the SEC’s draft proposed rules will: (i) curtail the use of derivatives; (ii) require internal policies and procedures for managing the risks associated with derivatives investments; (iii) enhance portfolio holdings disclosures; (iv) mandate that funds have a resolution plan; and (v) impose enhanced stress-testing requirements.

The pending mutual fund rules will focus on the asset management industry’s derivatives trading practices. The SEC is considering regulations that will prohibit funds from being sold to small investors, unless those funds limit their derivatives holdings. The proposal, if enacted, could significantly affect alternative mutual funds and certain exchange traded funds, both of which tend to rely heavily on derivatives in their investing strategies. Further, investment advisers will be required to have internal policies and procedures that address the risks associated with investments in derivatives. Finally, a fund’s derivatives holdings will be subject to a redemption requirement—that is, the fund must hold a sufficient amount of readily sellable securities to meet redemption requests.

The Journal has cited SEC officials as saying that the draft rules will mandate that each investment company maintain a resolution plan. Such a plan will likely provide for the rapid and orderly resolution of the investment company in the event of a material financial failure. It is probable that the resolution plan requirements will resemble those currently imposed on systemically important financial institutions.

Finally, the SEC’s draft proposed rulemaking will mandate periodic stress-testing of funds. While the stress tests will not require that funds maintain capital reserves, the tests will be designed to ensure that funds have sufficient liquidity to meet widespread redemption requests during periods of adverse economic conditions.

Although the draft rules must first be released as a proposed rulemaking and formally finalized, a process that may take months or years, it is important that investment advisers be on alert for further developments.


1 Andrew Ackerman, SEC Preps Mutual Fund Rules, Wall St. J. (Sept. 7, 2014),
2 Address by SEC Chair Mary Jo White, SEC Speaks 2014 (Feb. 21, 2014),