United States: Big Regulatory Changes In Store For Funds And Advisers? No One Knows For Certain, But Here's Our Best Guess

While no one knows for sure what the future holds for investment management regulation, the tea leaves indicate that we may expect a slowdown on new regulations, some pullback on parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), and an abundance of uncertainty. Here, we provide some observations for investment companies, their independent directors, investment advisers, broker-dealers and other service providers that want a peek at how we see the future unfolding.

To be sure, the future doesn't look the same as it did in October. Prior to the election, the Securities and Exchange Commission (SEC) pursued Chair White's regulatory and enforcement agenda for investment companies and investment advisers, and certain elements of the Senate sought an even more aggressive agenda by molding the SEC to meet its populist objectives.

But with the election of Donald J. Trump, suddenly everything is on the table. While little was said during the campaign about financial regulations (let alone about mutual funds), the future of Dodd-Frank, or at least portions of it, the Department of Labor's conflicts of interest rule (the "fiduciary rule"), the pending mutual fund derivatives rule and other regulatory initiatives now seem uncertain.

For a peek at what the future may hold, we start by looking at the President-elect's transition team, and by dusting off a piece of legislation introduced earlier this year by Representative Jeb Hensarling, a Texas Republican who chairs the House Financial Services Committee.

Transition team. The President-elect's appointment of Paul Atkins, a former SEC Commissioner, to the transition team may give us a window into his thinking. Mr. Atkins is generally viewed as against heavy regulation, and when he was a Commissioner, he was a frequent dissenter. The President-elect also appointed Anthony Scaramucci, the co-managing partner of SkyBridge Capital, known for his conservative views toward regulation and his vocal opposition to the fiduciary rule, to his team.

The Financial CHOICE Act. Representative Hensarling's 512-page bill, the Financial CHOICE Act of 2016, H.R. 5983 (known as the "CHOICE Act"), if enacted in its current form, would surgically dismantle major features – but certainly not all – of Dodd-Frank. Before November, this bill appeared to have little chance of going anywhere. But the bill, which the House Financial Services Committee passed by a vote of 30-26 on September 13, 2016, may serve as a harbinger of things to come.  What's coming down the road? Here is a guess of the changes to come. Rather than attempt to analyze how the new administration will address all issues relating to financial institutions, we focus on a few of the areas about which investment companies, investment advisers and fund directors may be most concerned.

The Securities and Exchange Commission. Perhaps the greatest change that will affect investment companies, advisers and fund directors is the composition of the SEC. Currently, there are two vacancies. When the new President appoints a new chair to succeed Mary Jo White, who recently announced her retirement, the SEC will be on a path to Republican majority leadership for the first time in eight years.

What could the SEC look like? The transition team may recommend Michael Piwowar, one of the three current Commissioners and the sole Republican, as Chair. It may also recommend Daniel Gallagher, another former Republican Commissioner (and Mr. Atkins' current partner at Patomak Global Partners, LLC, a Washington-based financial services consulting firm) or even Mr. Atkins himself to be the next Chair. The Wall Street Journal reported that the President-elect is considering Debra Wong Yang, a former U.S. attorney in Los Angeles to serve as Chair. In any event, with a majority of Commissioners who favor less, rather than more, regulation, we are likely to see the pace of new regulatory proposals slow and some subtle changes in enforcement trends.

Enforcement. Don't expect to see a wholesale halt of enforcement actions alleging fraud or corporate misdeeds. Rather, we can expect more levels of review and caution. The CHOICE Act contains broad-stroke steps designed to ensure "fair treatment during the course of SEC investigations," by expediting resolution, establishing an Enforcement Ombudsman to review and evaluate complaints about the enforcement process, and prohibiting use of novel unproven legal theories (e.g., "collective scienter") that would overstep existing legal boundaries. The CHOICE Act would also require more transparency into the enforcement process, and would let certain defendants appear before the SEC after receiving a Wells notice, before the SEC votes to bring an action.

The CHOICE Act would also strengthen certain penalties for fraud and deception. For example, it would allow the SEC to triple the amount of fines it assesses for certain violations.

The Volcker Rule. The CHOICE Act would repeal the Volcker Rule (Section 619 of Dodd-Frank). The Volcker Rule generally limits certain types of trading by banks and bank holding companies, specifically trading for their own account (i.e., proprietary trading), or sponsoring or owning an interest in a private fund (e.g., a hedge fund).

The Volcker Rule has been a thorn in the side of the financial services industry since its adoption, and investment banks have spent millions of dollars on compliance. While a repeal of the Volcker Rule would not affect registered investment companies directly, it would benefit investment advisers that are part of bank holding companies, and remove some capital-raising barriers for private funds.

Systemically important financial institutions (SIFIs). Dodd-Frank created the Financial Stability Oversight Council (FSOC) with a three-fold purpose to:

  • Identify risks to the financial stability of the U.S. that could result from financial distress or failures of financial institutions;
  • Promote market discipline so that private companies do not expect government bailouts; and
  • Respond to emerging threats to the stability of the U.S. financial system.

Dodd-Frank empowered FSOC to designate certain non-bank financial institutions as SIFIs. A SIFI designation means that a financial institution would be subject to capital requirements and more rigorous prudential regulation, which in essence allows FSOC to regulate a non-bank as if it were a regulated bank. Investment advisers, investment companies and insurance companies chafe under this law because, they argue, a SIFI designation results in massive compliance costs and other unintended consequences that may result in more, not fewer, risks.

The CHOICE Act would repeal FSOC's authority to designate SIFIs, and would retroactively repeal its previous designations of non-bank financial companies. This repeal would be welcome relief for large investment companies and their advisers, who face the threat of SIFI designation and all that comes with it.

Even if the House passes the CHOICE Act as approved by the Committee, it must still pass the Senate, where passage is not guaranteed. We expect that the Senate may require legislators to reach a compromise on some of the more controversial proposals, such as repeal of the Department of Labor (DOL) fiduciary rule or the Volcker Rule, so at this time, it is not possible to predict how much different the final bill will look from the version passed by the Committee.

The DOL fiduciary rule. Section 913 of Dodd-Frank authorized, but did not require, the SEC to establish a uniform standard of care for broker-dealers and investment advisers, and required the SEC to study and report on the issue. In 2011, the SEC staff published a report recommending that the SEC establish a uniform standard of care.

The SEC, however, was split on the merits of the recommendation, and before the SEC acted, the Department of Labor did an end run. With great fanfare, the Department finalized rules that impose a fiduciary standard on all who provide retirement investment advice to ERISA plans, plan fiduciaries and IRAs. That is, they must put their clients' best interests, before their own profits. These rules become effective in April 2017.

While the concept of the new rules is simple, implementation is not. Implementation of the fiduciary rule has already resulted in enormous compliance costs, and will have a trickle-down effect as investment companies scramble to reconfigure their product offerings to meet demands of brokers and intermediaries who sell their products to retirement investors. Another complication is that the SEC has yet to propose rules that would impose a fiduciary standard on broker-dealers that sell investments to non-retirement accounts.

Members of the President-elect's transition team have vocally opposed the fiduciary rule, asserting that it would actually reduce investment choices for lower-income families that cannot obtain the services of investment advisers, thus forcing them to accept less expensive retirement alternatives such as robo-advisers.

The new administration has a few options available for the fiduciary rule:

  • Let the fiduciary rule go into effect and address changes later (most likely). The fiduciary rule becomes effective not quite three months after the new president takes office. That does not leave much time to change or repeal the rule.
  • Immediately repeal the fiduciary rule (least likely). At the Department of Labor level, this option would take considerable time because of the long lead time to propose and implement a total repeal.
    • The CHOICE Act would repeal the DOL's rule by an act of legislation, and would restrict the DOL from adopting a similar rule until after the SEC issues a final rule under its Section 913 of the Dodd-Frank authority. Moreover, the CHOICE Act would require that before the SEC adopts its own rule, it must fully analyze how the rule could affect the availability of retirement products and access to investment advice for retail investors. (Because of timing issues the Congressional Review Act does not appear to be a vehicle for overturning the fiduciary rule.)
  • Delay implementation. More likely, the new administration would delay the implementation of the rule, scheduled for April 2017, to give it more time to figure out a more efficient way to dismantle it. Like others before him, Mr. Trump may put a moratorium on this and other pending regulations early in his term while he and his advisers consider how to proceed.
  • Not fight court challenges. Another path is for the new administration simply not to fight court challenges to the rule, and let the courts potentially invalidate the rule by declaring victory to the challengers without opposition. This assumes, however, that the courts will not permit third parties to defend the DOL's rules.

It is not clear at this point how the new administration is likely to proceed.

Use of derivatives by investment companies. In late 2015, the SEC proposed rules that would limit investment company use of derivatives and leverage. The rules would require registered investment companies to comply with one of two alternative portfolio limitations, establish new asset segregation requirements and require certain funds to adopt derivatives risk management programs.

This proposal was one of the key elements of Chair White's initiatives to identify and manage systemic risks presented by investment companies. It is now all but certain that the SEC will not adopt the final rule before her term ends in January 2017. It is possible, even likely, that the new SEC leadership will let this proposal hang in regulatory limbo until it can come up with a new approach.

Liquidity risk management. This train has left the station. It is unlikely that the SEC will pull back on the liquidity risk management rules that it recently adopted any time soon. But of course no one knows for sure.

Exchange-traded funds (ETFs). In May 2016, Chair White mentioned that the SEC's staff was looking at the interconnectedness of the prices of ETF shares and their portfolio holdings and the impact on investors when ETF arbitrage mechanisms do not function properly. She said that the staff was also looking at broker-dealer sales practices involving ETFs in particular. It is not clear at this point if the newly constituted SEC leadership will take any action on this issue.

Money market reforms. With money market reform largely completed, and with millions of dollars spent on implementation, it is unlikely that the SEC will undo the "floating NAV" rule. The SEC may take additional action if money market funds come under pressure in a new financial crisis, but that would have been the case no matter what occurs with the SEC leadership.

Regulation of investment advisers. Pre-Dodd-Frank, an investment adviser with fewer than 15 clients was exempt from registration. Hedge funds and private equity funds, no matter how large, were counted as one client. Dodd-Frank eliminated this exemption and, instead, requires an investment adviser with more than $150 million of assets under management to register, regardless of how many funds it advises, although advisers to venture capital funds that meet certain conditions are exempt from this registration requirement.

The CHOICE Act would repeal the provisions in Title V of Dodd-Frank concerning registration and examination requirements for investment advisers to private equity funds, and align the requirements to those that apply to venture capital funds. Otherwise, we do not expect that the new administration will support the repeal of any other provisions of Title V of Dodd-Frank.

Accredited investors. Rules under the Securities Act of 1933 ("1933 Act") define the minimum financial requirements for "accredited investors" who are eligible to invest in unregistered private funds. Investors in mutual funds are not subject to minimum financial requirements because they enjoy the investor protections of the Investment Company Act of 1940 and the 1933 Act. The CHOICE Act would amend the definition of accredited investor to expand the pool of eligible investors in private securities offerings.

Business development companies (BDCs). The CHOICE Act would incorporate the provisions of the Small Business Credit Availability Act, which was previously approved by the House Financial Services Committee. Among other things, that bill would ease leverage restrictions on BDCs.

Other provisions of the CHOICE Act. The CHOICE Act would also:

  • Eliminate the Office of Financial Research (OFR), formed to support FSOC. The OFR famously concluded that asset managers may present systemic risks to the U.S. financial system;
  • Eliminate restrictions on executive compensation contained in Title IX of Dodd-Frank;
  • Repeal the "Durbin Amendment" of Dodd-Frank, which restricted interchange fees that banks can charge on credit card transactions;
  • Reform the mission of the Consumer Financial Protection Bureau (CFPB); and
  • Much, much more.

Our Take

The bottom line: Expect some significant changes in some significant areas. When and where, and to what extent, are far from certain.

Meanwhile, until we learn otherwise, prudence dictates that we must proceed with compliance schedules and implementation of newly adopted regulations (e.g., the fiduciary rule and liquidity risk management) as planned, but step back and watch what happens on other SEC initiatives before making any dramatic changes in compliance approaches (e.g., derivatives risk management).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.