GENERAL COUNSEL'S ADDRESS
Speaker: Susan M. Olson, General Counsel,
Investment Company Institute
Ms. Olson noted the wide range of regulatory initiatives during 2018 and so far in 2019 that will impact registered funds and their service providers and shareholders. She applauded the SEC staff for generally taking an enterprising and forward-thinking (but measured) approach in attempting to address a number of areas that call for modernization and rationalization. She cited three rulemaking initiatives in particular, including (i) proposed Rule 6c-11 under the 1940 Act (ETF Rule), (ii) proposed Rule 12d1-4 under the 1940 Act (Fund of Funds Rule) and (iii) proposed Rule 18f-4 under the 1940 Act (Derivatives Rule).
ETF Rule. Ms. Olsen observed that the ETF Rule proposal represents a careful, thoughtful effort by the SEC to replace the existing patchwork of more than 300 SEC exemptive orders pursuant to which ETFs currently operate. She noted that the exemptive orders have been issued with evolving conditions on a case-by-case basis over many years. She explained that the rule, if adopted, would permit ETFs to satisfy certain conditions to organize and operate without the expense and delay of obtaining an exemptive order from the SEC. She said that the ETF rule would establish a consistent, transparent regulatory framework that should accomplish the SEC's objectives of leveling the playing field among existing ETF sponsors and making it less burdensome and expensive for new entrants, thereby facilitating greater competition and innovation among ETFs. Ms. Olsen commended the SEC for engaging thoughtfully with industry participants to design the ETF Rule, which codifies much of the standard 1940 Act exemptive relief ETFs rely on presently, without imposing new conditions and requirements that would force existing ETFs to dramatically change their structures and potentially threaten the long-term viability of the ETF industry.
Fund of Funds Rule. Ms. Olsen noted that, like the proposed ETF Rule, the Fund of Funds Rule is designed to replace a patchwork of SEC exemptive orders, as well as statutory exemptions, SEC rules and SEC staff guidance that currently govern 1940 Act fund of fund arrangements. She said that the SEC's goal of replacing the existing regime with a more consistent and efficient regulatory framework for fund of funds is laudable and worthwhile. She observed, however, that the Fund of Funds Rule, as proposed, would require substantial restructuring of many existing fund of funds arrangements in the industry. Among other proposed new conditions, she highlighted the proposed rule's redemption limits, which would generally restrict an acquiring fund (other than affiliated funds of funds relying on Section 12(d)(1)(G)) that holds more than 3% of an acquired fund's outstanding voting shares from redeeming more than 3% of the acquired fund's outstanding shares in any 30-day period. She commented that the proposed redemption limits may make many existing fund of funds arrangements unworkable, particularly smaller fund of funds. She also questioned the justification for redemption limits, noting that the SEC's new liquidity rule for open-end funds (Rule 22e-4 under the 1940 Act) should go a long way to addressing liquidity concerns that the redemption limits appear designed, in part, to address. She observed that the redemption limits themselves will create complexities and interpretive issues for open-end acquiring funds' liquidity risk management programs. Ms. Olsen encouraged the SEC staff to engage in a constructive dialogue with the industry during the comment period to consider and address these and other problematic aspects of the Fund of Funds Rule. Derivatives Rule. Ms. Olsen noted that the SEC had moved the Derivatives Rule back to its short-term regulatory agenda in 2018, and that the Division of Investment Management (Division) announced that it is considering a recommendation that the SEC re-propose a new rule designed to enhance and modernize the regulatory framework for registered funds' use of derivatives. She commended the SEC for having withdrawn its initial Derivatives Rule proposal issued in 2015, partially in response to concerns expressed by many in the industry during the comment process. She noted that the initial proposal would have unduly restricted funds in using derivatives for useful purposes, including hedging against various portfolio risks, seeking higher returns through increased investment exposures, gaining access to certain markets and achieving greater transaction efficiency. She stated that the SEC staff has been actively seeking input from various industry participants in developing a re-proposal, and that she is optimistic that a re-proposal will be issued in the near term, perhaps by the end of 2019. She is hopeful that a re-proposal will achieve the goal of modernizing and simplifying the current regulatory framework while maintaining sufficient protections for investors, but without unnecessarily limiting funds' use of derivatives for legitimate purposes.
A Discussion with Dalia Blass
Speaker: Dalia Blass, Director, Division of
Investment Management, US Securities and Exchange Commission
Ms. Blass discussed the Division's accomplishments in 2018 and its plans for 2019. In addition, she discussed some trends in asset management and their likely impact on future policy.
2018 Division Agenda and Accomplishments. Ms. Blass noted that 2018 was a busy period for the Division, fueled by the goals of improving the investor experience, modernizing regulatory approaches and using the Division's resources with the greatest efficiency possible. She said that improving the investor experience is high on the list of goals, citing initiatives including the SEC's (i) request for comment on improving investment company disclosures, (ii) proposals to improve variable annuity disclosure, including the introduction of summary prospectuses and (iii) adoption of a notice-and-access approach to the delivery of shareholder reports.
Ms. Blass highlighted the SEC's proposals designed to better align the legal requirements and mandatory disclosures applicable to financial professionals with investor expectations. She noted that the Division led the development of the proposed Form CRS "Relationship Summary," which could help stimulate conversations between retail investors and their financial professionals. Ms. Blass also discussed the Division's proposed Advisers Act interpretive guidance, which is intended to clarify the scope of an investment adviser's fiduciary duty. She further noted the Division's support for the development by the Division of Trading and Markets of proposed Regulation Best Interest, which is intended to enhance the standard of conduct of broker-dealers who make recommendations to retail investors.
With respect to modernizing the regulatory framework, Ms. Blass highlighted the Division's recommendations to the SEC regarding a number of new rules and rule proposals, including those relating to ETFs, fund of funds, fund liquidity reporting and fund research reports.
Ms. Blass observed that the Division's modernization efforts extended beyond rulemaking in 2018. She noted the launch of the Division's Board Outreach Initiative, which reviewed and reevaluated what fund boards are asked to do. In this regard, she highlighted the Division's recent no-action letters allowing boards to rely on the CCO certifications under the affiliated transaction rules and relating to inperson meeting requirements. She noted that the Division engaged with many boards and industry representatives in its efforts to update the SEC's valuation and auditing guidance.
Looking Ahead at 2019. Ms. Blass highlighted a number of projects the Division will focus on in 2019, including continuing the Investor Experience Initiative, improving investment company and variable annuity fund disclosures and exploring options for a summary shareholder report. She noted that the Division will prioritize delivering to the SEC recommendations regarding Form CRS and interpretive guidance clarifying the scope of investment advisers' fiduciary duty. Additionally, Ms. Blass said the Division will continue to work closely with the Division of Trading and Markets on Regulation Best Interest.
Ms. Blass noted her expectation that the Division will recommend updates to the SEC's valuation guidance, proposals on modernizing the advertising and solicitation rules for investment advisers and a re-proposal of a rule on the use of derivatives by investment companies during 2019. She noted that the Division will also advance into the public comment process a proposal to reform business development company and closed-end fund offerings. Furthermore, Ms. Blass stated the Division plans to continue reviewing prior staff interpretive statements and guidance to identify if any should be modified, rescinded or supplemented in light of market or other developments.
Proxy advisors. Ms. Blass cited recent discussions regarding the proxy process and the role of proxy advisory firms as prompting an effort to update and clarify current guidance about how investment advisers should fulfill their fiduciary duties in that area. To identify possible changes, she said the Division will focus on questions such as (i) how to promote voting practices that are in the best interests of advisory clients, (ii) whether advisers are expected to vote every proxy, (iii) how advisers should evaluate recommendations of proxy advisers and (iv) how advisers should address conflicts of interest that a proxy adviser may have.
International Policy. Ms. Blass then discussed the Division's significant focus on international policy. With regards to monitoring the effects of foreign policy on regulated entities, Ms. Blass cited MiFID II as an example of how non-US regulation can pose significant challenges for US firms. She noted that the no-action letters issued to assist US asset managers and broker-dealers comply with MiFID II will expire in July 2020. She stated that an SEC review had determined that extending the noaction relief may be unnecessary because the market may develop solutions to this problem without further regulatory relief.
Ms. Blass also highlighted the Division's continued dialogue with the IOSCO, the FSB and their members. She stated that the Division has made working with these international organizations a priority and has sought to contribute insights from the US experience.
Asset Management Trends in 2019. Ms. Blass addressed long-term trends in asset management. Ms. Blass said that regulatory changes should only be made with a clear understanding of costs and benefits and with attention to unintended consequences. In this regard, Ms. Blass said that the Division plans to focus on the impact of these changes on "Main Street" investors through a new outreach initiative to small and mid-sized fund sponsors regarding regulatory barriers. She noted that the Division is also considering forming an asset management advisory committee composed of experts with diverse viewpoints to discuss issues facing the industry.
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