Corporate & Securities Law

Andrew Donohue, Director, Division of Investment Management of the SEC, recently spoke to the 9th Annual IA Compliance Fall Conference.  He made a number of interesting remarks, including those related to sophisticated products. 

He stated many investment mandates have sought to align the management of the client assets with the client's investment risk and performance expectations by limiting the use of explicit leverage, the percentage of client assets invested in a particular security, issuer or sectors and the prohibition of certain practices.  The use of derivative instruments in managing client portfolios can provide benefits but also pose certain challenges.  Among those challenges, three major ones are (1) that the potential impact of derivatives on a portfolio are not related to the amount invested in the derivatives; (2) derivatives can offset the benefits that a portfolio might be expected to derive from the quantitatively mandated requirements; and (3) derivatives frequently have implicit leverage which can result in technical compliance with limitations on explicit leverage but expose the portfolio to precisely some of the risks associated with leverage that clients sought to avoid.  What to do, he asked?  His suggestion is that you develop the expertise and systems necessary to (1) insure technical compliance with the client's mandates; as you have traditionally done; and (2) insure that the actual exposure that the portfolio represents comply with that which the client would expect.  Conceptually this is, of course correct. Yet, he recognized that the quest is not easy.

SNSFE attorneys work with advisers to tailor their compliance programs.  Feel free to contact attorneys at SNSFE.

Source:  SEC