United States: Trump Administration Issues Guidance On Asset Management And Insurance Regulation

On Oct. 26, 2017, the U.S. Treasury Department (Treasury) released the latest installment in a series of reports on financial regulation required by the president's Feb. 3 executive order on the financial system. That order lists seven "core principles" underlying all Federal regulatory efforts in the financial sector — generally, (i) empowering American customers, (ii) preventing bailouts, (iii) fostering economic growth, (iv) enabling American competitiveness, (v) advancing American interests in international negotiations, (vi) making regulation efficient and (vii) restoring accountability.

The Oct. 26 report addresses asset management and insurance. Others in the series address banking (released June 12, 2017); capital markets (Oct. 6, 2017); and nonbank financial institutions, financial methodology and financial innovation (pending). A related executive order issued in April requires additional reports on the Orderly Liquidation Authority established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 111 P.L. 203 (Dodd-Frank), which is pending, and the process set forth in Dodd-Frank for identifying so-called systemically important financial institutions, or SIFIs, for regulation by the Federal Reserve Board of Governors (the Fed), which was released on Nov. 17, 2017.

Some of the notable observations and recommendations of the Oct. 26 report are as follows.

In Asset Management:

  • Prudential regulation of asset management is unlikely to be effective for mitigating systemic risk, if any, arising from this sector. This is mainly due to the relatively low level of leverage and liquidity management employed by the sector as opposed to banking.

  • While the Administration agrees in principle with the historical practice of limiting a mutual fund's (e.g., a registered investment company, or RIC) illiquid holdings to 15 percent of net assets, implementation of the "highly prescriptive" securities bucketing regime for liquidity risk management adopted by the Securities and Exchange Commission (the SEC) in 2016 should be postponed.

  • "Swing pricing" for redemptions by a RIC (in which non-redeeming investors are protected from some of the dilutive effects of redemptions) should be studied further. The SEC's permission of swing pricing on a voluntary basis, set to go into effect in November 2018, is noted by the report.

  • The SEC is called on to develop new rules (or reactivate an earlier proposal that stalled after 2008) to allow exchange-traded funds (ETFs) easier access to the capital markets by streamlining the process by which ETFs are cleared by the SEC for issuance and trading. Currently ETFs must obtain exemptive orders, on a case-by-case basis, from registration requirements of the Investment Company Act of 1940.

  • Rules of the Commodities and Futures Trading Commission (the CFTC) should be amended to exempt a RIC and its adviser from dual registration by the CFTC as a commodity pool operator (a CPO).

    • The CFTC and the SEC should work together in order to identify a single regulator (the SEC or the CFTC) in cases where de facto commodity pools operate without sufficient oversight.

    • The report also calls for greater cooperation between the SEC and the CFTC to share information, so that information filed by an entity with one of these bodies might satisfy the informational needs of the other body relating to the entity.

    • The CFTC should exempt private funds and their advisers from registration as a CPO if the adviser is "subject to regulatory oversight by the SEC."

    • Regulators and self-regulatory organizations should "rationalize and harmonize" reporting regimes to minimize reliance on redundant forms and submissions.

  • Treasury supports the prospective adoption by the SEC of a derivatives risk management program for RICs, but indicates a preference for risk-adjusted measures rather than the notional calculations under the rule proposed in 2015.

  • The Report notes the Treasury's recommendations, set forth in its Report on Banking, on relaxing some of the restrictions of the Volcker Rule (Section 619 of Dodd-Frank and the Federal agencies' final rule thereunder1). The Volcker Rule generally imposes restrictions on the ability of banks and non-bank SIFIs to engage in proprietary trading and to hold "ownership interests" in certain types of private funds. The report urges further efforts to "reduce the burden" of the Volcker Rule on asset managers and investors, including continued forbearance from enforcing

    • the proprietary trading restrictions against foreign private funds that are not "covered funds" under the Rule and

    • the restriction on funds' ability to share names with banking entities.

  • Treasury also recommends amending Dodd-Frank to limit stress testing requirements for investment companies and investment advisers, either by eliminating all such obligations or by deeming money market fund stress testing pursuant to SEC Rule 2a-7 and liquidity risk management programs pursuant to SEC Rule 22e-4 as satisfying Dodd-Frank mandates.

  • In addition, the 2016 SEC proposal requiring registered investment advisers to adopt written business continuity plans should be withdrawn as overly costly and onerous.

  • In the area of international financial regulatory negotiations, financial stability risk assessments should be tailored to industry sectors. The United States should play a leading role in international standard-setting bodies such as the Financial Stability Board and the International Organization of Securities Commissions and should work to improve the operations of these bodies.

  • The Report calls for delay in implementation of the Fiduciary Rule.

    • The rule, proposed in April 2016 by the Department of Labor (the DOL) and effective in June 2017, subject to transition relief recently extended from Jan. 1, 2018 to July 1, 2019, would generally expand the scope of persons deemed to be "fiduciaries" for purposes of the Employee Retirement Income Security Act of 1974 (ERISA)) and Section 4975 of the Internal Revenue Code. This would have the effect of, among other things, prohibiting commission-based compensation from being used when providing financial advice to owners of individual retirement accounts, or IRAs, unless the adviser observes certain impartiality covenants pursuant to the so-called "best interest contract exception."

    • Citing the risk that financial professionals might adopt different practices for accounts that "are nearly identical," the report warns of "unintended consequences" and harm to investors if the Fiduciary Rule in its current form is put into full effect.

    • The report also calls for the SEC, the DOL and the states to work together to implement a regulatory framework appropriately tailored to both preserve investor choice and protect retirement investors in an efficient and effective manner, and to analyze the effects of different standards of care on the availability of annuities in the retirement market.

In Insurance:

  • States generally should continue as the prime engines of insurance law and regulation, with the Federal Insurance Office (the FIO) and other federal bodies consulting with the states regularly on insurance matters being addressed at the Federal level. This should mitigate the risk of duplicative mandates.

  • As with asset management, entity-based systemic risk assessments are not the best approach for mitigating sector-wide risks. The United State should support the International Association of Insurance Supervisors (the IAIS) in its focus on an activities-based approach and should take steps to improve the IAIS's methodology for identifying global systemically important insurers, or G-SIIs. 

  • The group capital standards being developed and implemented by the National Association of Insurance Commissioners (the NAIC), the states and the Fed should be harmonized to avoid unnecessary redundancy. 

  • The FIO's mission should be confined to five "pillars" — (i) promoting the U.S. state-based regulatory system in international discussions, (ii) providing insurance expertise to the U.S. government, (iii) providing leadership and cooperation between the federal government and state regulators, (iv) protecting the financial system by advising Treasury and the Financial Stability Oversight Council on insurance-related matters that may pose threats and (v) promoting insurance products and administering the Terrorist Risk Insurance Program. 

  • The FIO should be more transparent and should engage more regularly with state regulators. 

  • The Fed is called on to leverage information received by state insurance regulators and the NAIC on savings and loan holding companies that are insurance companies, in order to avoid duplicative regulatory efforts. 

  • The report calls on Congress to clarify what is included in the "business of insurance" for purposes of Dodd-Frank's grant of authority to the Consumer Financial Protection Bureau, which is proscribed from regulating insurance matters. 

  • The Department of Housing and Urban Development should reconsider its "disparate impact" rule, pursuant to which housing practices may be deemed discriminatory as to a protected class, regardless of intent, if the practices unevenly affect access to housing. The report explains that disparate impact could adversely affect availability of homeowner's coverage and may be inconsistent with state, rather than federal, primacy in the regulation of insurance. 

  • On data security and cyber risks, Treasury endorses the NAIC's model law on Insurance Data Security (formally adopted by the NAIC mere days before the report was released) and calls on states to adopt it promptly. If uniform state laws for insurance company data security are not in place in five years, Congress should adopt legislation, but this should be administered by the states. 

  • States that have not entered the Interstate Insurance Product Regulation Compact should do so in order to further the use of uniform standards in regulating life insurance products. 

  • States should adopt the NAIC's Producer Licensing Model Act and should generally try to ease compliance burdens imposed on insurance agents and brokers. 

  • Internationally: 

    • The report calls for the IAIS to postpone the next version of its capital standard for internationally active insurance groups, or IAIGs, beyond its anticipated 2019 completion date in order to accommodate further discussion and refinement.

    • The IAIS should take additional steps to increase transparency and collaboration with all of the IAIS's stakeholders (such as U.S., NAIC and state officials).

    • The FIO should coordinate the efforts of the federal government, state insurance regulators and the NAIC to speak with one voice at the IAIS and advance American interests.

    • The report notes approvingly the September 2017 completion of the Covered Agreement between the United States and the European Union (the EU) providing for reciprocal treatment in certain regulatory areas for insurers doing business across those jurisdictions, as well as the administration's policy statement issued in conjunction therewith, affirming the state insurance regulatory system.

    • The Treasury calls for exploring whether a Covered Agreement between the U.S. and the U.K. would be mutually beneficial "should the United Kingdom (U.K.) withdraw from the EU."

  • States should consider a more "calibrated" approach to insurance company investments in infrastructure, including revisions to risk-based capital laws, to make these investments more attractive from a regulated-capital perspective. 

  • The DOL and Treasury should pursue steps to encourage the use of annuities in defined contribution retirement plans covered by ERISA. The report cites ERISA compliance as a reason for the decline in defined-benefit pensions in the private sector.
  • Treasury will convene an interagency task force among interested federal agencies to develop policies to "complement reforms at the state level" in the area of long-term care insurance. The task force is called on to collaborate with the NAIC on its efforts.


1 12 CFR Parts 44, 248, and 351 17 CFR Part 255.

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