A month ago, the US mutual fund industry gathered in Florida for the annual ICI Mutual Funds and Investment Management Conference. One of the striking things about the event this year was how European it felt. How can a US mutual fund conference in an Orlando resort feel European? What I mean is that the mood reminded me of the atmosphere that permeated European asset management conferences a few years ago.
One of the quirks of the Great Reregulation has been that, by and large, US asset management has escaped relatively unscathed. Oh sure, there has been money market fund reform but that has been the exception, rather than the rule. Overall, US asset management has had pretty easy sledding the last few years.
This comes in stark contrast to their asset management cousins on the other side of the Atlantic, who have faced a constant stream of new regulation for the last seven years. It’s been widely quoted that EU asset managers have faced approximately forty pieces of regulation since the financial crisis. Direct regulations, such as the AIFMD, have created a new regulatory framework for hedge and private equity funds in Europe, and the latest iteration of the EU regulatory framework for retail funds in UCITS 5. There has also been a cavalcade of regulation working its way through the pipeline such as PRIIPs, MiFID 2, and Solvency 2 that all, to varying degrees, impact European asset managers.
Judging from the mood at ICI, it seems that US asset management’s relatively calm passage is looking much choppier these days. Over the last year, the SEC proposed a number of new rules that would substantially impact the US asset management industry. The proposals include:
- Reporting modernization –Changes to US mutual fund reporting rules designed to increase the frequency of reporting and improve the quality of the information provided to the SEC.
- Liquidity rules –Requirements for all registered US open-end funds to adopt detailed liquidity risk management programs, as well as associated governance practices and disclosures.
- Derivatives rules –New limits for the use of derivatives by US registered funds, as well and mandating new risk management measures.
- Department of Labor (DOL) Fiduciary Standard: Requirements for investment advisers to act in their clients’ best interest first and eliminate trailer fees paid to advisers from mutual funds.
Individually, any one of these proposed regulatory changes would be a lot to deal with. Taken together, they represent probably the largest regulatory change program that US asset management has faced in a generation. The scale of the challenges is so broad that a panelist at ICI went so far as to use the term “regulatory tsunami” (a phrase that was en vogue amongst European asset managers a few years ago). From the ICI panel discussions and chatter in the hallways that while asset managers are concerned about the totality of change they are facing, it is clear the two issues weighing most heavily on the industry are the DOL Fiduciary Standard and the SEC’s liquidity rules.
Based on what happened in Europe, US asset managers have a tough few years ahead. This will require persistent focus on not only preparing for regulatory change but also thinking about what the landscape will look like after the change. Those who start planning now for the landscape after the regulatory change will be in a better position to provide solutions to investors. As they navigate the regulatory changes, US asset managers in need some comfort can always look to their cousins across the Atlantic, who have already traveled much of this regulatory journey.