United States: The Future Of Investment Management Regulation: What To Expect In 2017

In this fast-changing regulatory environment, the long-term consequences – both intended and unintended – of recent White House actions remain uncertain, but looking into our crystal ball, we see certain trends emerging. These trends may lead to long-term shifts in how the Securities and Exchange Commission approaches regulation and enforcement, but, at least in the short-term, we see little change in the oversight responsibilities of fund directors.

Of course, while nobody knows for sure what the future will bring, we've made our best guess.

WHITE HOUSE ACTIONS

  • Presidential "TwoFer" Order. By Presidential Executive Order dated Jan. 30, unless prohibited by law, when an "executive department or agency publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed." The TwoFer Order requires agencies to offset any new incremental costs associated with new regulations, to the extent permitted by law, with the "elimination of existing costs associated with at least two prior regulations."

    Three days later, the White House published a memorandum that clarified that the TwoFer Order does not apply to independent regulatory agencies, including the SEC, the Federal Reserve and most bank regulators. Nevertheless, the memorandum said, "we encourage independent regulatory agencies to identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of new significant regulatory actions."

    The real issue is whether the White House will ask the new SEC chair to comply voluntarily with this order. It may prove difficult for the new chair to say no.

    We believe the real issue here is regulatory costs, not the number of regulations. The Feb. 2 White House Memorandum explained that agencies may comply with this requirement by issuing two "deregulatory" actions for each significant regulatory action that imposes costs, resulting in a full cost offset.

    Federal law requires the SEC to estimate the costs of implementing a new rule and publish those estimates in the Federal Register. It appears to also apply to amendments to existing rules.

    If the SEC voluntarily complied with the TwoFer Order, the SEC would be busy keeping a score card as it identifies costly rules to cut back when it adopts new rules. Some rules, like Rule 30e-2, may actually reduce regulatory compliance costs. It is not clear whether the SEC would receive a cost "credit" against future regulatory costs.
  • Presidential Order establishing "Core Principles" for regulating financial institutions. A February 3, 2017 Presidential Order established six "Core Principles" for regulating the U.S. financial system:

    1. empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
    2. prevent taxpayer-funded bailouts;
    3. foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazards and information asymmetry;
    4. enable American companies to be competitive with foreign firms in domestic and foreign markets;
    5. advance American interests in international financial regulatory negotiations and meetings; and
    6. restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.
    The order directs the secretary of the Treasury to consult with the SEC chair and other members of the Financial Stability Oversight Council to identify laws, treaties, regulations or guidance that inhibit federal regulation of the financial system consistent with the core principles. The order seeks to identify existing laws and rules for repeal.
  • Presidential Memorandum concerning the DOL fiduciary rule. The controversial fiduciary rule adopted in April 2016 is set to be implemented on April 10, 2017 and is subject neither to the Priebus regulatory freeze nor the Presidential TwoFer Order.

    On February 3, 2017, memorandum to the secretary of labor, the White House directed the Department of Labor to review the fiduciary rule to consider whether it should be modified or rescinded. The president's order instructed the DOL to consider whether the fiduciary rule would

    • harm investors' access to financial advice and certain retirement products;
    • disrupt the retirement services industry in a manner that would adversely affect investors; and
    • cause an increase in litigation or the prices investors would pay to gain access to retirement services.

If, after completing its review, the DOL concludes that the fiduciary rule would adversely affect investors, then it must publish for notice and comment a rule that would rescind or revise it.

The memorandum stopped short of delaying the April 10, 2017 implementation date. The White House, however, reportedly is asking to delay implementation by 180 days, presumably to allow time for the DOL to propose a rule that amends or revokes the fiduciary rule. At this point, the future of the fiduciary rule is not clear. Whether the DOL delays, or proposes to revise or revoke, the fiduciary rule, many broker-dealers are already moving toward adopting a fiduciary standard for retirement accounts.

RULES REGULATING INVESTMENT COMPANIES AND ASSET MANAGERS

  • Mutual fund use of derivatives. Final rules to regulate mutual fund use of derivatives and require funds to adopt enhanced risk management measures were wrapped up, tied with a bow, and ready for consideration by the SEC last December. Proposed Rule 18f-4 under the 1940 Act was a casualty of the inability of the SEC to rustle up a quorum of the three SEC commissioners, which precluded a vote. So, the rule remains a proposal. Given its complexity, we expect it is unlikely to see sunlight in its current form any time soon. This rule would likely increase compliance costs to funds and investment advisers.
  • Web-based transmittal of shareholder reports. Proposed Rule 30e-3 under the 1940 Act would provide an optional method for investment companies to transmit shareholder reports through the fund's website. While this proposal also fell victim to the SEC's December quorum conundrum, this proposal is more likely to proceed because Acting Chair Michael Piwowar supported it. This rule would likely decrease costs to funds and shareholders.
  • Registration of investment advisers. In 2011, the SEC adopted rules that required investment advisers to private funds to register if they met certain statutory thresholds for assets under management. The new rules also created exemptions for advisers to venture capital funds, private fund advisers with less than $150m in AUM, and private fund advisers. These rules implemented parts of the Dodd-Frank Act. Despite calls from some quarters to repeal Dodd-Frank, we do not believe Congress will rush to repeal these provisions.
  • Venture capital funds. The Financial CHOICE Act (H.R. 5983) would broaden the exemption from the definition of an investment company for venture capital funds. Currently, to qualify for the small fund exemption, a venture capital fund can have no more than 100 beneficial owners. The proposal would expand this limitation to no more than 250.
  • Security-based swap intermediaries. The SEC was set to finalize rules regarding capital margin requirements for security-based swap intermediaries. In the waning days of Chair Mary Jo White's SEC tenure, it appeared the commissioners would unanimously adopt these rules, but again fell victim to the inability to muster a quorum. Given that these rules are relatively non-controversial, and with Piwowar's support, the newly composed SEC may proceed to adopt them. This rule likely would increase costs.
  • Existing rules at risk. Over the past three years, the SEC has published several high-profile rules that required funds and advisers to overhaul operations and compliance, including the money market reform rules, liquidity risk management programs, investment company reporting modernization, swing pricing and amendments to Form ADV and reporting rules under the Investment Advisers Act.

Some of these rules, like the liquidity risk management rule adopted in October 2016, may present tempting targets. The SEC estimated that its one-time cost for funds ranges from $800,000 to $10.2m, with an average cost per fund complex of $1m, and an aggregate industry cost of $855m. This doesn't include indirect costs funds will pay to lawyers and accountants to revise policies and procedures and compliance reporting, and costs attributable to compliance with the companion reporting modernization rules.

While it is not likely the newly constituted SEC will act swiftly to eliminate the reporting or other rules, the SEC may pull back discrete parts that may reduce compliance costs, regardless of whether it says it will voluntarily comply with the TwoFer Order.

  • Examinations. Under White, the Office of Compliance Inspections and Examinations adopted a risk- based and data-driven approach to investment adviser examinations. We expect this trend to continue and OCIE to pursue the examination priorities published in January 2017. Subsequent to the publication of the priorities, however, OCIE Director Mark Wyatt resigned, throwing into question whether a new director will establish the same priorities. It would be reasonable to expect OCIE to stay on this course, and we do not expect to see the pace of exams slow down.
  • SEC Regulatory Accountability Act. Regardless of how the TwoFer order affects the SEC, a bill that the House passed on January 12, 2017, may further restrict the SEC's rulemaking ability if passed by the Senate and signed into law. The SEC Regulatory Accountability Act (H.R. 78) would require the SEC, before issuing a new regulation, among other things, to identify the problem that the rule is designed to address and ensure that the benefits justify the cost. The bill would also require the SEC to review periodically all regulations to determine if they are outmoded, inefficient or excessively burdensome.

FUND DIRECTORS AND COMPLIANCE OFFICERS

  • Investment company independent directors. While oversight responsibilities may shift if the SEC modifies or pulls back on certain regulations, there is little to suggest that the well-established statutory and fiduciary oversight responsibilities of fund directors will change, at least in the short term. Whether or not the SEC pulls back on regulations or shifts its examination priorities, fund directors will continue to be responsible for approving investment advisory contracts and distribution plans, reviewing compliance programs, and monitoring portfolio performance and conflicts of interest, among other things. If anything, the oversight role of independent directors may grow if the SEC shifts away from specific rules to a more principles-based approach.
  • Chief compliance officers. Similarly, the role of chief compliance officers and compliance personnel is not likely to diminish any time soon, and may grow if the SEC trends toward a more principles-based approach.

CONCLUSION

While we don't foresee the SEC rushing to repeal existing rules, we don't expect to see a clamor to adopt new ones either. The overall pace of rulemaking may slow, but not grind to a halt. We expect the SEC to proactively expand or contract regulations indirectly through new guidance and interpretations, which bypass the formal regulatory process. And in the process, the role of fund directors likely will grow as the SEC shifts toward a more principles-based approach to regulation.

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

Registration

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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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.