Protecting Investors through Proactive Regulation of Derivatives and Robust Fund Governance
Commissioner Luis A. Aguilar
Dec. 11, 2015
Today, the Commission considers new rules that are designed to protect investors by addressing the use of derivatives by registered investment companies.[1] As demonstrated by the 2008 financial crisis, and the economic turmoil that followed, years of regulatory complacency and deregulation enabled an unregulated derivatives marketplace to cause significant losses to investors.[2] In response to that crisis, in 2010, Congress passed the Dodd-Frank Act to address the causes of the financial crisis, and specifically included provisions in Title VII of the Act mandating the establishment of a regulatory framework for addressing broad categories of derivatives.[3] This process is still ongoing.
Meanwhile, the global derivatives market remains huge, at an amount estimated in excess of $630 trillion in notional value worldwide.[4] In addition, there has been a notable growth in the use of derivatives by registered investment companies.[5] The growth is particularly remarkable with alternative strategy funds, which tend to use derivatives in the hope of achieving higher returns.[6] For example, in 2010, there were only about 590 alternative strategy funds, with around $320 billion in assets under management.[7] By the end of 2014, however, there were more than 1,100 such funds, with total assets under management in excess of $469 billion.[8]
Other types of registered funds also make extensive use of derivatives. As a point of comparison, according to a white paper authored by the Commission’s Division of Economic and Risk Analysis (DERA), as of April 2015, the derivatives exposure of traditional mutual funds, exchange-traded funds, and alternative strategy funds were 29%, 29%, and 73%, respectively.[9] In fact, some of the funds that use derivatives have notional exposures almost ten times in excess of the funds’ net assets.[10] This raises obvious questions as to whether these exposures place undue risks on the funds’ investors and whether they negatively affect a fund’s ability to withstand financial shocks.
The increased use of derivatives by registered funds is a particular risk for retail investors. As a former Director of the Division of Investment Management has said, retail investors might find it challenging and difficult to comprehend and appropriately weigh the trade-offs posed by sophisticated and complex investment strategies.[11] This is a concern that has grown in recent years, as retail investors continued to pour money into alternative mutual funds, a subcategory of alternative strategy funds.[12] In fact, the alternative mutual fund market grew from about $76 billion in assets at the end of 2009 to over $311 billion in assets at the end of 2014.[13] Because alternative mutual funds tend to rely more heavily on derivatives to achieve their investment goals,[14] there can be an accompanying rise in complexity—and risk. With retail investors expected to continue to drive the growth of alternative mutual funds in coming years,[15] the potential risk to retail investors will only increase. The Commission’s mandate to protect investors, therefore, calls for a sharper focus on funds’ use of derivatives and for putting in place prudent safeguards to ensure funds properly manage the associated risks.
Today, in order to begin addressing the issues arising from registered funds’ increased use of derivatives,[16] the Commission considers new rules that will require a fund entering into derivatives transactions to comply with certain portfolio limitations; maintain an amount of assets to enable the fund to meet its obligations; and establish a derivatives risk management program if the fund’s exposure reaches a certain threshold.[17] More importantly, all registered funds with exposures to derivatives must put in place a system to manage and monitor risks, as well as segregate assets.[18] Simply stated, while all funds would be expected to keep an eye on what they are doing with derivatives, their regulatory responsibilities will increase in tandem with their exposure to risks posed by derivatives.
Protecting Investors from the Risks Posed By Derivatives
Today’s rules are part of the Commission’s broader focus on derivatives. For example, the Commission has focused on the risks posed by derivatives to investors through, among other things, enforcement actions, the examination program, investor education, and rulemaking initiatives.[19] In recent years, the SEC has brought a number of enforcement cases involving derivatives, including more than 25 cases in Fiscal Year 2015 alone, and brought several cases where a fund’s use of derivatives caused significant investor losses—losses driven mainly by exposures to certain commercial mortgage-backed securities, out-of-money put options, short variance swaps, or credit default swaps.[20]
In addition, under Chair White’s leadership, the Commission has continued to be active on the regulatory side. Indeed, the Commission has now proposed all of the Title VII rules under the Dodd-Frank Act, and adopted a number of these rules.[21] Still, several rules remain to be adopted. Today, more than five years after the passage of the Dodd-Frank Act, the presumptive regulatory regime for the securities-based swap market is still a work-in-progress. Specifically, the regulatory regime for these derivatives, and its main components, has not yet gone into effect.[22] To this end, as I have done on prior occasions,[23] I urge my fellow Commissioners to move with urgency to adopt the rest of the long-overdue Title VII rules. These rules are necessary to promote transparency and accountability in the derivatives market.
The Importance of Fund Governance
Now, I want to highlight the importance of a fund’s corporate governance. As I have stated on other occasions, a robust corporate governance structure goes a long way in protecting investors by, among other things, identifying potential risks before they metastasize into larger problems.[24] I recognize that this is easier said than done. As today’s release points out, a fund’s use of derivatives—and the associated risks—presents challenges not only for the fund’s investment adviser but also for a fund’s board of directors.[25]
Fund boards already have extensive regulatory responsibilities in overseeing fund operations and protecting investor interests.[26] Under the current regulatory regime, a fund board needs to oversee the fund’s compliance with the relevant federal securities laws and other regulatory requirements.[27] Among other things, this includes the responsibility for ensuring that fund assets are invested in a way that is consistent with the fund’s investment objectives, policies, restrictions, and risk profile.[28]
Although existing board responsibilities already include a general obligation to oversee a fund’s derivatives use, today’s proposed rules would add specific responsibilities. Under the proposed rules, fund boards would be required to do a number of things:
- First, if applicable, a fund board must approve a fund’s derivatives risk management program, any material changes to the program, and the fund’s designation of the fund’s derivatives risk manager.[29] Under the proposed rules, this formalized program must be reasonably designed to assess the risks of derivatives transactions, manage and monitor risks, segregate functions of fund personnel, and require annual updates and reviews.[30]
- Second, a fund board must review written reports prepared by the derivatives risk manager, at least on a quarterly basis, and review the adequacy and effectiveness of the derivatives risk management program.[31]
Imposing these responsibilities on fund boards is necessary and appropriate. As the investors’ representatives, fund boards play a critical role in overseeing fund operations. Thus, if a fund chooses to integrate derivatives into its investment strategies, it is only appropriate to require that its board also take on the responsibilities outlined in our proposed rules today.[32]
Still, every time the Commission votes to add responsibilities to boards of directors, I consider whether boards are prepared and equipped to take on those added responsibilities, which seem only to increase in number and complexity over time. Taking on additional responsibilities will require more time, resources, and, of course, expertise. Given that fund board members generally serve the fund on a “part-time basis,” increasing the size and complexity of their obligations, legal responsibilities, and exposures to liability is something to consider thoughtfully.[33] This is particularly true in the context of derivatives risk management, given the complexities of a derivatives marketplace that is only expected to continue to evolve and grow over time.[34] Nevertheless, under our existing corporate structure, these burdens are inherently part of a fund board’s responsibilities.
The vital role that boards have in fostering integrity in our capital markets and for setting the appropriate tone from the top, safeguarding assets, and promoting accountability are well-recognized.[35] As the spectrum of risk increases, the overall supervision of risk management will become even more crucial to fulfilling a board’s obligations.[36] Accordingly, I urge fund boards to be proactive in foreseeing the challenges and opportunities that lie ahead, and to how best to navigate them.[37] To this end, fund boards must continue to evaluate—such as through periodic reviews—whether its members, collectively, have the requisite skills, experience, time, and resources that are needed as a fund’s operations, objectives, and investment strategies change over time.[38]
Ultimately, investors rely on fund boards to be competent stewards of the fund’s assets and investors’ interests. Investors must be able to remain confident that a fund board can effectively execute all of its fiduciary and regulatory responsibilities.[39] I am hopeful, and confident, that boards will do so.
Conclusion
To conclude, I will support today’s proposing release. This rulemaking is a positive and important step in the right direction, and it is consistent with the SEC’s investor protection mandate—particularly, the protection of retail investors.
Finally, I want to thank the SEC staff for your work in this release, especially the staff in the Division of Investment Management and DERA. I appreciate your engagement with my office and for responding to all of my questions and comments.
Thank you.
[1] Use of Derivatives by Registered Investment Companies and Business Development Companies, Release No. IC-31933 (Dec. 11, 2015), available at http://www.sec.gov/rules/proposed/2015/ic-31933.pdf (“Derivatives Proposing Release”). For purposes of these remarks, the terms “registered investment companies” or “registered funds” refer to mutual funds, exchange-traded funds, close-end funds, and business development companies that are subject to Section 18 of the Investment Company Act of 1940. See id. at 1. I note that today’s rulemaking is one of those few instances in which a Commission Concept Release actually became a proposed rule. See Concept Release, Use of Derivatives by Investment Companies under the Investment Company Act of 1940, IC-29776, File No. S7-33-11 (Aug. 31, 2011), available at http://www.sec.gov/rules/concept/2011/ic-29776.pdf.
[2] Better Markets, Inc., The Cost of the Crisis: $20 trillion and counting (July 2015), available at http://www.bettermarkets.com/sites/default/files/Better%20Markets%20-%20Cost%20of%20the%20Crisis.pdf. See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs, The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 29 (2010) (“Many factors led to the unraveling of this country’s financial sector and the government intervention to correct it, but a major contributor to the financial crisis was the unregulated over-the-counter (‘OTC’) derivatives market.”), available at http://www.gpo.gov/fdsys/pkg/CRPT-111srpt176/pdf/CRPT-111srpt176.pdf.
[3] Derivatives Proposing Release at II.A.2; see also Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”), available at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.
[4] See, Bank for International Settlements, Statistical release: OTC derivatives statistics at end-December 2014, at 15 (Table 1) (Apr. 2015), available at http://www.bis.org/publ/otc_hy1504.pdf.
[5] Derivatives Proposing Release at IV.B.
[6] Derivatives Proposing Release at IV.B. As used here, “Alternative Strategy Funds” refer collectively to alternative mutual funds, commodities funds, and nontraditional bond funds. See Division of Economic and Risk Analysis, Use of Derivatives by Registered Investment Companies, at 2-3 & n.7 (Dec. 2015), available at [link], (“DERA White Paper”).
[7] DERA White Paper at Table 2 (Dec. 2015).
[8] Id.
[9] See Derivatives Proposing Release at IV.B.; DERA White Paper at 1, 3, Table 6 (Panel E), and Figures 11.4 and 11.10 (the analysis in the Division’s white paper is based on, among other things, its collection of “detailed, hand-collected random sample of 10% of funds based on Form N-CSR filed for 2014 [and] assembling data on certain of those funds’ derivatives positions,” as well as supplementing this random sampling with information from Morningstar and Form N-SAR.)
[10] Derivatives Proposing Release at II.B.4.
[11] See Norm Champ, Director, SEC’s Division of Investment Management, Remarks to the ALI CLE 2014 Conference on Life Insurance Company Products (Nov. 13, 2014) (noting that “promoting informed investment decisions with respect to the sometimes complex investment strategies employed by alternative mutual funds . . . requires a focus on clear and effective disclosure.”), available at http://www.sec.gov/News/Speech/Detail/Speech/1370543436709.
[12] Trefis Team, How The SEC's Examination Of Alternative Funds Affects BlackRock, Forbes (Aug. 28, 2014) (noting that alternative mutual funds “have seen a significant inflow of funds over the last 18 months from retail investors looking for higher returns in the current low interest rate environment.”), available at http://www.forbes.com/sites/greatspeculations/2014/08/28/how-the-secs-examination-of-alternative-funds-affects-blackrock/; see DERA White Paper at 2-3 & n.7; see supra n. 6 (categories of funds considered “Alternative Strategy Funds”).
[13] This information was provided by the SEC’s Division of Investment Management; see also, Norm Champ, Director, SEC’s Division of Investment Management, Remarks to the Practising Law Institute, Private Equity Forum (June 30, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370542253660 (“As I mentioned earlier, the alternative mutual fund market had over $300 billion in assets as of the end of May [2014]”).
[14] Alternative funds typically hold more non-traditional investments—such as global real estate, commodities, leveraged loans, start-up companies, and unlisted securities that offer exposure beyond traditional stocks, bonds and cash—and employs more complex trading strategies. See Financial Industry Regulatory Authority, Investor Alerts, Alternative Funds Are Not Your Typical Mutual Funds (June 11, 2013), available at http://www.finra.org/investors/alerts/alternative-funds-are-not-your-typical-mutual-funds (last visited Dec. 6, 2015).
[15] See McKinsey & Co., The Trillion-Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investments, 4 (Aug. 2014) (noting that “[r]etail alternatives will be one of the most significant drivers of U.S. retail asset management growth over the next five years, accounting for up to 50 percent of net new retail revenues.”), available at http://dailyalts.com/wp-content/uploads/2014/08/McKinsey-Company_2014_Capturing-the-Next-Wave-of-Growth-in-Alternative....pdf.
[16] Derivatives Proposing Release at IV.B.
[17] Derivatives Proposing Release at III.
[18] See Derivatives Proposing Release, Proposed Rules 18f-4(a)(2), 18f-4(a)(4), and 18f-4(a)(6)(v); Derivatives Proposing Release at III.D.
[19] On the examination front, the SEC’s priorities for 2015 focused on, among other things, registrants that develop new structured products and offer them to retail investors. See SEC’s Office of Compliance Inspections and Examinations, National Exam Program: Examination Priorities for 2015, at 2, available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf (last visited Dec. 1, 2015). Additionally, in August of this year, the Office of Compliance Inspections and Examinations (OCIE) issued a risk alert after finding deficiencies relating to the sale of derivatives to retail investors. See Office of Compliance Inspections and Examinations, National Exam Program: Risk Alert, Broker-Dealer Controls Regarding Retail Sales of Structured Securities Products (Aug. 24, 2015), available at http://www.sec.gov/about/offices/ocie/risk-alert-bd-controls-structured-securities-products.pdf. Investor education in the derivatives area is also important given the ongoing need to improve investors’ readiness to recognize red flags associated with risky investments. In fact, a 2012 SEC staff study on investor financial literacy found that retail investors—particularly the elderly and minorities—lack basic financial literacy skills. See SEC Press Release, SEC Issues Financial Literacy Study Mandated by the Dodd-Frank Act (Aug. 30, 2012), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484290; U.S. Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors, at iii (Aug. 2012), available at http://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf. Although there have been some efforts over the years to address investor financial literacy, we are still nowhere near where we should be.
[20] According to the SEC’s Division of Enforcement, it has brought about 29 cases in Fiscal Year 2015 relating to derivatives. See, also, U.S. Securities and Exchange Commission, Agency Financial Report, at 156-157 (Fiscal Year 2015), available at http://www.sec.gov/about/secpar/secafr2015.pdf; See Derivatives Proposing Release at II.D.1.; In the Matter of OppenheimerFunds, Inc. and OppenheimerFunds Distributor, Inc., Investment Company Act Release. No. 30099 (June 6, 2012), available at http://www.sec.gov/litigation/admin/2012/33-9329.pdf; In the Matter of Claymore Advisors, LLC, Investment Company Act Release. No. 30308 (Dec. 19, 2012), available at http://www.sec.gov/litigation/admin/2012/ia-3519.pdf; In the Matter of Fiduciary Asset Management, LLC, Investment Company Act Release. No. 30309 (Dec. 19, 2012), available at http://www.sec.gov/litigation/admin/2012/ia-3520.pdf; In the Matter of UBS Willow Management L.L.C. and UBS Fund Advisor L.L.C., Investment Company Act Release. No. 31869 (Oct. 16, 2015), available at http://www.sec.gov/litigation/admin/2015/33-9964.pdf.
[21] The following is a non-exhaustive list of the SBS rules that have been proposed and/or adopted since the passage of the Dodd-Frank Act. See, e.g., Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 75611 (Aug. 5, 2015), available at http://www.sec.gov/rules/final/2015/34-75611.pdf; Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for Statutorily Disqualified Associated Persons to Effect or Be Involved in Effecting Security-Based Swaps, Exchange Act Release No. 75612 (Aug. 5, 2015), available at http://www.sec.gov/rules/proposed/2015/34-75612.pdf; Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” Exchange Act Release No. 66868 (Apr. 27, 2012), available at http://www.sec.gov/rules/final/2012/34-66868.pdf; Section 15F of the Exchange Act; Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations, Exchange Act Release No. 67286 (June 28, 2012), available at http://www.sec.gov/rules/final/2012/34-67286.pdf; Clearing Agency Standards, Exchange Act Release No. 68080 (Oct. 22, 2012), available at http://www.sec.gov/rules/final/2012/34-68080.pdf; Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities, Exchange Act Release No. 72472, at 3 (June 25, 2014), available at http://www.sec.gov/rules/final/2014/34-72472.pdf; Security-Based Swap Data Repository Registration, Duties, and Core Principles, Exchange Act Release No. 74246 (Feb. 11, 2015), available at http://www.sec.gov/rules/final/2015/34-74246.pdf; Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 74244 (Feb. 11, 2015), available at http://www.sec.gov/rules/final/2015/34-74244.pdf; Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC, Exchange Act Release No. 63107 (Oct. 14, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63107.pdf; End-User Exception to Mandatory Clearing of Security-Based Swaps, Exchange Act Release No. 63556 (Dec. 15, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63556.pdf; Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), available at http://www.sec.gov/rules/proposed/2014/34-71958.pdf; Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), available at http://www.sec.gov/rules/proposed/2011/34-63825.pdf; Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 64766 (June 29, 2011), available at http://www.sec.gov/rules/proposed/2011/34-64766.pdf; Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), available at http://www.sec.gov/rules/proposed/2012/34-68071.pdf; Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), available at http://www.sec.gov/rules/proposed/2013/34-69490.pdf; Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 74245 (Feb. 11, 2015), available at http://www.sec.gov/rules/proposed/2015/34-74245.pdf; Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), available at http://www.sec.gov/rules/proposed/2011/34-63727.pdf.
[22] The main components of Title VII consists of four main clusters of rules—intermediary rules, clearing rules, trading rules, and reporting rules—that have been proposed and need to be adopted. See, e.g., Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for Statutorily Disqualified Associated Persons to Effect or Be Involved in Effecting Security-Based Swaps, Exchange Act Release No. 75612 (Aug. 5, 2015), available at http://www.sec.gov/rules/proposed/2015/34-75612.pdf; Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC, Exchange Act Release No. 63107 (Oct. 14, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63107.pdf; Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 64766 (June 29, 2011), available at http://www.sec.gov/rules/proposed/2011/34-64766.pdf; Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), available at http://www.sec.gov/rules/proposed/2012/34-68071.pdf; Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), available at http://www.sec.gov/rules/proposed/2013/34-69490.pdf; End-User Exception to Mandatory Clearing of Security-Based Swaps, Exchange Act Release No. 63556 (Dec. 15, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63556.pdf; Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), available at http://www.sec.gov/rules/proposed/2014/34-71958.pdf; Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), available at http://www.sec.gov/rules/proposed/2011/34-63825.pdf; Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps, Exchange Act Release No. 63236 (Nov. 3, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63236.pdf; Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 74245 (Feb. 11, 2015), available at http://www.sec.gov/rules/proposed/2015/34-74245.pdf; Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), available at http://www.sec.gov/rules/proposed/2011/34-63727.pdf; see also Commissioner Luis A. Aguilar, Establishing a Registration Framework for Dealers and Major Participants in the Derivatives Market (Aug. 5, 2015), available at http://www.sec.gov/news/statement/establishing-a-registration-framework-for-dealers.html; Commissioner Luis A. Aguilar, Regulating Key Players in Security-Based Swaps (Oct. 12, 2011), available at https://www.sec.gov/news/speech/2011/spch101211laa-sbs.htm.
[23] See Commissioner Luis A. Aguilar, Finishing the Work of Regulating Security-Based Derivatives (Sept. 15, 2015), available at http://www.sec.gov/news/statement/finishing-the-work-of-regulating-security-based-derivatives.html; Commissioner Luis A. Aguilar, Establishing a Registration Framework for Dealers and Major Participants in the Derivatives Market (Aug. 5, 2015), available at http://www.sec.gov/news/statement/establishing-a-registration-framework-for-dealers.html; Commissioner Luis A. Aguilar, Focusing on Dealer Conduct in the Derivatives Market (Apr. 29, 2015), available at http://www.sec.gov/news/statement/focusing-on-dealer-conduct-in-the-derivatives-market.html; Commissioner Luis A. Aguilar, Creating a Regulatory Infrastructure to Address the Lack of Transparency in the Security-Based Swap Market (Jan. 14, 2015), available at http://www.sec.gov/news/statement/security-based-swap-market-transparency-commissioner-aguilar.html; Commissioner Luis A. Aguilar, Beginning to Shine a Light on the Opaque Derivatives Market: Defining Dealers and Major Participants in the Cross-Border Context (June 25, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542555565.
[24] See Commissioner Luis A. Aguilar, The Important Work of Boards of Directors (Oct. 14, 2015), available at http://www.sec.gov/news/speech/important-work-of-boards-of-directors.html; Commissioner Luis A. Aguilar, Board of Directors, Corporate Governance and Cyber Risks: Sharpening the Focus (June 10, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370542057946; Commissioner Luis A. Aguilar, Looking at Corporate Governance from the Investor’s Perspective (Apr. 21, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370541547078.
[25] Derivatives Proposing Release at II.A., III.D.4.
[26] These responsibilities range from arguably routine and mundane tasks—such as declaring dividends, electing officers, appointing committees, calling shareholder meetings, and adopting and amending bylaws—to more extensive and involved responsibilities like approving investment advisory agreements, monitoring portfolio liquidity, approving affiliated transactions, and overseeing portfolio valuations, among other supervisory responsibilities. See Investment Company Act of 1940, 15 U.S.C. 15(a) and (c); 17 C.F.R. 270.2a-7; Investment Company Act of 1940, 15 U.S.C. 17; 17 C.F.R. 270.17a-1 through 17a-10; Investment Company Act of 1940, 15 U.S.C. 2(a)(41); 17 C.F.R. 270.2a-4; Investment Company Institute, ICI Investor Awareness Series, Understanding the Role of Mutual Fund Directors, available at https://www.ici.org/pdf/bro_mf_directors.pdf; see also Independent Directors Council, Additional Resources, Statutory and Regulatory Responsibilities of Fund Boards Under the Investment Company Act of 1940, available at http://fundamentals.idc.org/additional/additional_statutory.
[27] See, e.g., Investment Company Act of 1940 Rule 38a-1 (Compliance procedures and practices of certain investment companies); Derivatives Proposing Release at III.D.1.
[28] Derivatives Proposing Release at II.A.
[29] Derivatives Proposing Release, Proposed Rule 18f-4(a)(3)(ii).
[30] Derivatives Proposing Release, Proposed Rule 18f-4(a)(3)(i).
[31] Derivatives Proposing Release, Proposed Rule 18f-4(a)(3)(ii)(B).
[32] Derivatives Proposing Release at III.D.4.
[33] Although some fund boards meet more frequently, they are only required to meet quarterly. Commissioner Luis A. Aguilar, The Important Work of Boards of Directors (Oct. 14, 2015), available at http://www.sec.gov/news/speech/important-work-of-boards-of-directors.html.
[34] Derivatives Proposing Release at I.
[35] Commissioner Luis A. Aguilar, The Important Work of Boards of Directors (Oct. 14, 2015), available at http://www.sec.gov/news/speech/important-work-of-boards-of-directors.html.
[36] See Martin Lipton, Steven A. Rosenblum, and Karessa L. Cain, Some Thoughts for Boards of Directors in 2015 (Dec. 2, 2014), available at http://corpgov.law.harvard.edu/2014/12/02/some-thoughts-for-boards-of-directors-in-2015/ (“In addition, the risk management paradigm has evolved … to being characterized also as a governance issue that is squarely within the purview of the board’s oversight role.”); Proxy Disclosure Enhancements, Exchange Act Release No. 61175 (Dec. 16, 2009), available at http://www.sec.gov/rules/final/2009/33-9089.pdf.
[37] See Commissioner Luis A. Aguilar, The Important Work of Boards of Directors (Oct. 14, 2015), available at http://www.sec.gov/news/speech/important-work-of-boards-of-directors.html; see Spencer Stuart Board Index 2014, Spencer Stuart (Nov. 2014), available at https://www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/ssbi2014web14nov2014.pdf?la=en; see also Patrick R. Dailey, Ph.D and Joel M. Koblentz, Refreshing Your Board Of Directors, The Corporate Board (Nov./Dec. 2012), available at https://atlanta.nacdonline.org/files/ChaptersLayout/ChapterContent/Atlanta/Refreshing%20Your%20board%20of%20Directors%20The%20Corporate%20board%20Magazine.pdf.
[38] Commissioner Luis A. Aguilar, The Important Work of Boards of Directors (Oct. 14, 2015), available at http://www.sec.gov/news/speech/important-work-of-boards-of-directors.html.
[39] Id.