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.
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.
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.
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:
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
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.