The U.S. Treasury Department ("Treasury") published its third report pursuant to President Donald J. Trump's Executive Order 13772, establishing core principles for regulation of the financial system (see coverage of first and second reports). In the new report, Treasury evaluates regulation of the asset management and insurance industries and makes numerous recommendations to enhance the regulatory frameworks for those industries (see also Fact Sheet on report).
In general, Treasury took the position that regulators should not use an entity-based approach to evaluate systemic risk for asset managers or insurance companies. Instead, regulators should use an activities- and product-based approach that would identify certain business activities as having higher systemic risk characteristics. An appropriate regulatory framework would then be established by primary regulators to address elevated engagement in those activities.
Specifically, Treasury made the following recommendations, among others:
- Investment advisers and investment companies should not be subjected to stress testing requirements.
- The SEC should postpone the scheduled December 2018 implementation of the Rule 22e-4 liquidity bucketing requirement for mutual funds. Treasury supports the 15% limitation on illiquid assets. However, Treasury rejects any highly prescriptive regulatory approach to liquidity risk management, such as the bucketing requirement.
- Treasury supports the aspects of the SEC derivatives rule for registered investment companies that requires (i) a risk management program and (ii) an asset segregation requirement. However, SEC portfolio limits should be based on more risk-adjusted measures.
- The SEC should advance an exchange-traded funds ("ETFs") rule that allows for such funds to enter the market without requiring exemptive orders (subject to conditions imposed by the SEC).
- The CFTC should change its rules to allow SEC-registered investment companies to avoid dual registration and regulation by the CFTC as commodity pool operators ("CPOs"). The SEC and CFTC should establish a process to identify a single regulator (either the CFTC or the SEC) for these entities.
- The CFTC should amend its rules to exempt private funds and their advisers from registration as CPOs if the advisers are subject to regulatory oversight by the SEC.
- The SEC should finalize its rule on shareholder report disclosures allowing reports and prospectuses to be delivered electronically and permit the use of implied consent for electronic disclosures.
- The SEC, CFTC and self-regulatory organizations should coordinate their data reporting and disclosure requirements for asset managers.
- Regulators should take action to reduce Volcker Rule burdens. They should continue non-enforcement of the proprietary trading restrictions against foreign private funds and refrain from enforcing the restriction on funds sharing names with banks.
- The U.S. should take a leading role in international standard-setting bodies, and take action to revise global frameworks for more appropriate and effective risk management.
- The Department of Labor should further delay implementation of the fiduciary rule and work with the SEC and other regulators to assess standard-of-conduct issues to ensure the best interests of retirement investors are served.
- The SEC and DOL should establish coordinated efforts to address standards of conduct for financial professionals providing investment advice for retirement accounts and non-retirement accounts, and coordinate with states to establish a framework that protects investors and promotes investor choice.
- The National Association of Insurance Commissioners ("NAIC"), state regulators and the Board of Governors of the Federal Reserve System should continue to coordinate capital and liquidity initiatives.
- States should adopt the NAIC Insurance Data Security Model Law, and if this does not result in timely uniform data security regulations, Congress should pass a law establishing requirements for insurer data security.
- Improving information sharing within the insurance industry should be a point of focus for Treasury and state regulators to reduce cybersecurity risk.
- The DOL and Treasury should develop proposals regarding establishing an independent fiduciary entity to assess financial strength of annuity providers. This could help ERISA-governed plan sponsors to comply with fiduciary obligations for selecting annuity providers for plans, among other benefits.
The fourth and final report that Treasury intends to publish pursuant to Executive Order 13772 will cover nonbank financial institutions, financial technology and financial innovation.
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