“SEC’s mission is to protect investors and support responsible capital formation,” said Raymond Slezak, Assistant Regional Director at the Securities and Exchange Commission (SEC). He was the second of three presenters at the GARP-sponsored webinar held February 17, 2015, on Alternative Mutual Funds: Risk Governance Under SEC Security.
Liquid alternative mutual funds were “listed as a priority” as early as 2013, he said, because “any time there’s rapid growth” or “concern about the dynamics of money managers moving into an area,” it attracts SEC interest.
As a metaphor about the regulatory thought about the new funds, Slezak repeated a quotation from Andrew Bowden, director of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations at a conference in May 2014: “Alternative funds are the bright, shiny object. But they’re a sharp object.”
Slezak was frank about compliance risks and challenges of managing a liquid alternative mutual fund. Now that alternative funds have access to new pools of capital, they must comply with rules on liquidity, leverage, and fund governance. For example, the portfolio must be regularly stress tested for adverse economic times. “Liquidity becomes critical at these times. Look at SIVs—they were liquid right up until the financial crisis hit. Then they weren’t,” Slezak reminded the listeners.
There are higher standards in Board reporting and monitoring. Basically, “if [it falls into] a Morningstar category, make sure the fund is not at great variance” with others in the category, he suggested.
The Board must make sure there is adequate personnel to monitor the fund. The Chief Compliance Officer (CCO) “is the eyes and the ears of the Board” so he or she should be knowledgeable and ask good questions. “It’s up to the Board to determine whether to replace the CCO or provide extra training,” Slezak said.
He cautioned about conflicts in which the investment advisor might favour the hedge fund. “A hedge fund being managed alongside the liquid alternative fund is a conflict of interest situation.”
When asked what to expect on future exams of liquid alternative mutual funds, Slezak said, “liquid alternatives continue to be an area we will review.” ª