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White Urges Mutual Fund Directors to Be Alert to Emerging Risks

SEC Chair Mary Jo White told mutual fund directors to be vigilant about potential risks, such as cyber attacks and cash flow shortages. The dramatic growth in the fund industry and the wide variety of investment strategies have increased the types of risks directors have to respond to.

SEC Chair Mary Jo White told mutual fund directors to be vigilant in addressing potential risks, such as cyber attacks and cash flow problems.

Speaking at the Mutual Fund Directors Forum in Washington on March 29, 2916, White said the asset management industry’s growth and diversity presents directors with a host of challenges. The industry grew to $18 trillion in assets under management in 2015 from $1 billion in 1940. The industry’s changes have also led to some funds increasingly investing in less liquid securities and using more derivatives.

“With these developments have come new risks and challenges,” White said. “It is simply not enough in today’s environment and markets to be reactive to contingencies — we all need to be proactively thinking ahead and planning.”

For example, White said cybersecurity risk not just theoretical.

“We, in fact, saw the problems asset managers can face in this area quite clearly and concretely in an enforcement case we settled in September that charged an adviser … after a hacker stole sensitive information about more than 100,000 individuals from the web server used by the adviser,” White said. Regulation S-P requires funds and advisers to have policies for safeguarding customer information and protecting against anticipated threats to and unauthorized use of the information.

White reminded fund directors to review IM Guidance Update No. 2015-02: Cybersecurity Guidance, issued in April 2015.

“There are some obvious initial questions to ask fund management — like how will my fund’s and its service providers’ compliance policies and procedures, business continuity plans, and back-up-systems address these situations?” White said. “If your funds and their service providers do not have robust plans and procedures, you have some urgent business to attend to.”

She added that funds have to do more than have technology security policies, they need to quiz fund managers and technology and operations executives about their technology security efforts and how they would respond to a data breach.

White also said directors should be mindful of operating risks and their ability to raise short term funds if there is a spike in redemptions.

In August 2015, Bank of New York Mellon Corp. was unable to provide share prices for a week because of a software problem. Separately, in December, Third Avenue Management LLC’s Focused Credit fund, which was loaded with junk bonds, had to stop customer withdrawals.

Both events put an extra level of responsibility on fund directors.

“As a director, it is incumbent upon you to consider what these and other risk areas could mean for your fund in the future,” White said. “Asking tough questions of fund management now can help ensure that your funds are as prepared as possible and you are informed as to how potential issues would be handled.”

Boards should also consider the current composition of the directors and if they have the necessary skills and experience to deal with ever complex areas such as cybersecurity, derivatives, liquidity, trading, pricing, and fund distribution, she added.