SEC rules to land on asset management industry this fall

SEC rules to land on asset management industry this fall
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The $67 trillion asset management industry is about to face a major set new of regulations as the Securities and Exchange Commission wraps up an ambitious rulemaking agenda this fall.

The SEC has proposed several rules for mutual funds and investment advisers that agency chief Mary Jo White and her staff are working to finalize before she likely departs in January.


Two of those plans could be finalized as early as this month, sources have told The Hill Extra.

One of those proposed rules would require funds to report new monthly data to the SEC. The other plan, aimed at curbing risks, would require funds to classify assets by liquidity.

David Blass, general counsel for the Investment Company Institute, said the SEC “will certainly complete those two proposed rules by the end of the year and quite possibly in coming weeks.”

“White has been very clear on data reporting and liquidity risk management for funds,” Blass, former chief counsel of the SEC’s trading division, said in an interview with The Hill Extra.

Setting an agenda and rulemaking legacy.

White set forth five initiatives in late 2014 to overhaul the way the SEC regulates the industry.

The agency has issued proposed rules on four of the five initiatives. Those four initiatives are focused on data reporting, liquidity risk management, derivatives in funds, and transition planning. The last initiative, which White says staff is working on, is on stress testing. 

The ambitious agenda sparked a flood of comment letters and meetings with industry members.

Norm Champ, former director of the SEC’s investment management division who helped shape the agenda, said White has plenty of work to do but is determined to leave a rulemaking legacy.

“She has a challenging road ahead of her between now and the election,” said Champ, who is now with law firm Kirkland & Ellis, in an interview with The Hill Extra. “She would rather have her legacy be that she got a bunch of rules adopted rather than a bunch of rules proposed.”

Robert Grohowski, general counsel for the Investment Adviser Association, echoed that. “White has a prime agenda for asset management that she has made a centerpiece of her regulatory priorities,” he told The Hill Extra. “She would like to see as much of it done as possible.”

Judy Burns, a spokesperson for the SEC, declined to comment beyond remarks earlier this year on the proposed liquidity and derivatives rules. In May, White told an industry audience, “It is our responsibility to promptly finalize these rules, which I expect to move forward on this year.”

White has said the data reporting and transition planning rules could some soon. “We expect the other proposed reforms to be finalized in the near term as well,” she said in September.

Curbing risks following the financial crisis.

While the SEC set its asset management agenda to update its regulation of the industry, the agency was also responding to calls for reforms in the wake of the 2008 financial crisis.

Of the five initiatives, the plan to limit derivatives in funds has proven to be the most complex and scrutinized. White said the proposed rule is aimed at curbing leverage risks and protecting investors, but the industry has argued that derivatives promote stability by hedging against risks.

If White finalizes the derivatives rule this year, the proposed calculations on portfolio limits could be modified to accommodate some concerns from the industry. At the same time, she has faced tough criticism from Democrats and investor advocates to adopt the rules as proposed. 

Under its data reporting initiative, the SEC completed a rule that will require investment advisers to submit new information on their registration forms regarding separately managed accounts.

The agency is nearing the finish line on its other data reporting rules, which include permitting advisers to deliver shareholder reports and prospectuses online, as well as the liquidity rule.

Much like the derivatives rule, the liquidity rule garnered stiff feedback from the industry and could undergo some changes to the proposed asset classification system before its adoption this fall.

In June, the SEC proposed a rule for its fourth initiative that would require advisers to write business continuity and transition plans to use during a crisis, natural disaster, or cyber attack.

While there has been uncertainty within the industry on whether the agency will adopt the rule this fall, White made clear in recent remarks that it would get done in the “near term.”

Under the last initiative, the SEC would apply stress tests to funds and advisers. This is the one initiative for which White hasn’t proposed a rule. SEC staff that would be putting together the plan has been busy finalizing the data reporting and liquidity rules, according to ICI’s Blass.

Regulating an industry and complying with rules.

White, who spent an earlier part of her career as the United States Attorney for the Southern District of New York, has prioritized her asset management agenda over the last two years to ensure the SEC remains the primary regulator of mutual funds and investment advisers.

Other government bodies, including the Financial Stability Oversight Council and the Labor Department, have been looking at the industry for more oversight. FSOC, a panel of the top financial regulators, has been studying asset management activities for possible risks.

Meanwhile, the Labor Department has issued a fiduciary rule that will take effect next April.

The industry must deal with those developments as it braces for several of the SEC rules to be adopted, ICI’s Blass said. Each rule will involve “huge reams” of new data, he added.

“We hope the SEC gives us enough time to adjust our systems and compliance to prepare,” Blass said. “But it is very important for funds and advisers to get on top of these rules now.”

IAA’s Grohowski noted that the industry is taking on significant additional compliance burdens.

“Lots of folks in the industry are feeling like they’re being asked to do a lot more in order to keep up,” Grohowski said. “There is a crushing cumulative cost of compliance with each rule.”

This story was updated at 5:45 p.m.