Asset Managers Endeavor to Endure the Fast Pace of Rulemaking

Asset Managers Endeavor to Endure the Fast Pace of Rulemaking

July 2022

By Charles Hawkins

It got busy.  And it is about to get busier. There’s no sign of things slowing down for Asset Managers.

The response to the administration’s policy agenda has seen the Securities and Exchange Commission, and other regulators significantly pick up the pace with their plans to adopt new rules governing asset managers, as forecasted in last year’s regulatory agendas.  This new wave of rulemaking began in the fourth quarter last year and has continued through to this spring.  According to Bloomberg, the SEC is embarking on “one of the most ambitious agendas in the SEC’s 87-year history.”1

 

This fast-paced rulemaking approach is causing stakeholders to work much harder to understand and respond to this large volume of rule proposals.  This has led some to argue that the SEC should slow down and take a more targeted approach.  On April 25, 2022, SIFMA wrote:

 

“To get through this unpredictable and volatile time, the U.S. capital markets – and the businesses, workers, and families that depend on them – need certainty, stability and prudence from Washington. Unfortunately, the Securities and Exchange Commission (SEC) is pursuing an unprecedented rulemaking agenda that could compound our current challenges and result in adverse consequences for the real economy in terms of output, employment, investment and prices.”2

 

Exacerbating the challenge for industry stakeholders is the recent trend coming from the SEC that allowed shorter windows in which commenters may respond to these proposals.  This trend became subject of a letter issued to SEC Chair Gensler by Congressman Patrick McHenry and Senator Pat Toomey, who wrote on January 10, 2022 that they were “concerned that the Securities and Exchange Commission (“SEC”) rulemakings under your tenure have consistently provided unreasonably short comment periods, which will harm the quality of public comment and may run afoul of the Administrative Procedure Act.”3

 

Two of the major themes contained in these rule proposals are a focus on enhancing disclosures for investors (and in regulatory filings with the Commission) and promoting the safety and resiliency of investment products.

 

Tell the Truth, the Whole Truth, and Nothing but the Truth

 

Progress is being made in Commission rulemaking to enhance transparency to better position investors so they can make better-informed decisions about their investments.  The outcome of this work was apparent in a number of rule proposals that have been recently issued by the Commission.

 

 For example: 

  • Reporting of Proxy Votes:  In September 2021, the SEC issued a rule proposal that would amend Form N-PX to enhance the information mutual funds, ETFs, and certain other funds currently report annually about their proxy votes; and would require certain institutional investment managers to report annually on Form N-PX about how they voted proxies relating to executive compensation matters.
  • Reporting of Securities Loans:  In November 2021, the Commission proposed a rule that would require any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association, which in turn would make some of this information available to the public.
  • Reporting of Short Positions and Short Activity:  In February 2022, the Commission proposed to require that institutional investment managers that meet or exceed a specified reporting threshold would be required to report, on a monthly basis, specified short position data and short activity data for equity securities.  

As welcome as these rule proposals may be to investors and asset managers, they come at a cost.  New processes may be required to collect and aggregate data that will be disclosed to investors and reported to the Commission.  To the extent that fund managers seek assistance from their service providers to assist with these new requirements, existing oversight measures may need to be amended.  For example, beyond the development of the compliance solutions themselves, amended 38a-1 compliance policies/procedures may need to be adopted by funds and their service providers.  Additionally, new recordkeeping and record-retention measures will need to be implemented because of these new rule proposals.

 

Investor Protection and Product Resiliency

 

Enhanced disclosure is certainly a tool to promote investor protection and the SEC has issued several other proposals to further protect investors and improve the resiliency of financial products.  In recent months, the SEC has proposed: 

  • Shortening the Settlement Cycle:  In February 2022, the Commission released a series of proposed rule changes to facilitate the shortening of the settlement cycle from T+2 to T+1 by March 2024.  One of the primary reasons for this change is that this reduction in time between trade and settlement dates will mitigate market, credit, and liquidity risk.
  • Cybersecurity Risk Management:  In March 2022, the Commission issued a rule proposal that would require all advisers and funds to adopt and implement cyber security policies and procedures.  These policies and procedures would be required to address risks associated with service providers that receive, maintain or process adviser or fund information, or that are permitted to access their information systems.
  • Money Market Fund Reform:  At least partly in response to the stresses experienced in short-term funding markets in March 2020 stemming from the COVID-19 pandemic, in December 2021, the Commission proposed a number of reforms for money market funds.  These reforms include: (1) Removal of liquidity fees and redemption gates provisions in the existing rule; (2) Implementation of mandatory swing pricing for certain types of money market funds; (3) Increasing minimum liquidity requirements; (4) Specifying how money market funds with stable net assets would handle a negative interest rate environment; (5) Mandate how funds must calculate weighted average maturity and weighted average life; and (6) Amendments to certain reporting requirements. 

The rule proposals related to further reforming money market funds may lead some fund managers to wonder if the cure is worse than the disease.  These fund managers may determine that continuing to offer certain of their money market fund products would no longer be feasible. For example, Jane Heinrichs, associate general counsel at the Investment Company Institute, has been quoted as saying, "We really do believe that it would kill the product. Funds would determine it's not worth the changes necessary to make it work for a product that will no longer meet the needs of investors."4

 

Conclusion

 

While asset managers have been busy digesting the pace of rule proposals, the real work has yet to begin.  So far, asset managers  have responded to the new proposals, engaged in industry forums, discussed these proposals with their service providers, and assessed the impact of a rule proposal.  The real work begins upon the issuance of a final rule; when business requirements are truly known based on the actual rule, development is undertaken, new policies and procedures are implemented, service providers are engaged, and compliance programs are updated.  

Charles Hawkins

Principal - Regulatory Business Solutions

BNY Mellon Asset Servicing


 

  1. https://www.bloomberg.com/news/articles/2021-10-08/sec-chief-to-wall-street-the-everything-crackdown-is-coming
  2. https://www.sifma.org/resources/news/the-secs-current-far-ranging-aggressive-rulemaking-agenda-will-raise-regulatory-uncertainty-and-risks-unintended-negative-consequences/
  3. https://republicans-financialservices.house.gov/uploadedfiles/2022-01-10_pmc_toomey_letter-gensler_sec_comment_period.pdf
  4. https://www.reuters.com/business/finance/us-money-market-funds-say-sec-draft-rule-would-kill-some-products-2022-04-11/


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