Home » risk management

Category: risk management

Series Trust Fund Manager Pays $10 Million for Ignoring Risk Limits


A mutual fund manager agreed to pay over $10 Million to settle charges that it did not observe its own risk management practices, which ultimately resulted in the fund losing 20% of its value.  The fund, part of a larger series trust and converted from a private fund in 2013, invested in S&P 500 index futures contracts.  The fund’s marketing materials described significant risk management procedures that would limit downside through hedged positions and stop-loss triggers.  The SEC alleges that the portfolio manager ignored the risk mitigation limits and that the CEO failed to supervise him.  The SEC charges several violations of the Advisers Act including the antifraud provisions.  A federal lawsuit continues against the portfolio manager, and the CFTC also settled charges with the respondents.

Don’t allow your portfolio managers to play regulatory Jenga.  Very often, former private fund managers have a hard time abiding by the strictures imposed by the Advisers Act and the Investment Company Act.  Firms should impose heightened supervision and training to ensure that hedge fund PMs understand the limitations. 

More Work for the CCO in SEC’s Proposed Derivatives Rule


The SEC has once again proposed new derivatives rules for registered funds including mutual funds, ETFs, closed-end funds, and BDCs.  Funds that employ derivatives would be required to limit leverage to 150% of the value-at-risk of a designated referenced index.  The fund would also have to create a derivatives management program that would include a designated derivatives risk manager in addition to stress testing, backtesting, reporting and escalation procedures, and reviews.  Different rules would apply to levered or inverse funds, although any adviser or broker-dealer recommending or selling such funds would have to implement due diligence procedures for retail accounts.  A 60-day comment period will follow publication.

Here we go again.  The SEC tried derivatives reform back in 2015 but never adopted the rule in the face of industry objections.  The new proposal puts a lot of burden on the designated derivatives risk manager which, we expect, means more work for the Chief Compliance Officer.    

Clearing Agency Fined $20 Million for Inadequate Policies and Procedures


The sole registered clearing agency for exchange listed option contracts agreed to pay $20 Million in fines to the SEC and the CFTC for failing to adopt and implement reasonable policies and procedures.  The regulators allege that the clearing agency, an SRO designated as a systemically important financial market utility under the Dodd-Frank Act, did not adopt or enforce reasonable policies and procedures related to margin, credit exposure, risk management, and information security.  Also, the firm failed to obtain required approval  for changes in core risk management policies.  In addition to the fines, the respondent agreed to retain an independent compliance auditor and implement a series of board and executive level risk management oversight mechanisms.

The regulators can impose significant fines and penalties for failures to implement required policies and procedures without alleging any underlying loss or harm to investors.  The failure to implement required risk management and compliance policies can itself serve as the predicate for an enforcement action.

SEC Adopts Liquidity Risk Management Program Rule


The SEC has adopted a new rule requiring open-end registered funds to establish liquidity risk management programs.  New Rule 22e-4 will require registered funds to implement a program that assesses liquidity risk, classify securities into one of four liquidity categories, set a liquidity minimum, and report violations of overall portfolio illiquidity limits.  The liquidity risk program also requires Board oversight including the designation of a fund officer to administer the program.  The SEC also adopted new monthly portfolio disclosure rules for registered funds as well as a rule allowing funds to use swing pricing.  Fund complexes with more than $1 Billion in net assets must comply with the liquidity risk management rule by December 1, 2018.

OUR TAKE: The new rules will require a great deal of additional work for the folks in operations, legal and compliance.  The Oper-Pros will need to figure out how to pull and classify the data.  The lawyers will have to create additional disclosures.  And, the Compli-Pros will likely be the appointed officers to administer the programs.