Some US financial regulations are on hold, while others are moving full steam ahead. Here’s a roundup of the latest changes and what asset managers need to know.
US President Donald Trump signed three executive orders in April aimed at streamlining financial regulation and reversing parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, some of the financial regulations proposed under the Obama administration have been delayed, others are being revised, and at least one initiative from the Trump administration is moving forward. Here’s an update on the most significant changes.
Fiduciary Rule: The Department of Labor (DOL) under the Obama administration issued the rule under the Employee Retirement Income Security Act of 1974 to require all investment professionals who manage retirement plans or give retirement advice to act as fiduciaries who must hold their client’s interests above their own in all matters. On November 27, the DOL formally delayed implementation of the rule until July 1, 2019. At the same time, Jay Clayton, chairman of the Securities and Exchange Commission (SEC), said that he had concerns about parts of the proposed regulation and indicated that the SEC, which is the primary regulator of brokers, would take a stronger role in framing the revised Fiduciary Rule.
SEC Liquidity Rule: In October 2016, the SEC issued rule 22e-4, requiring investment management companies other than money market funds to adopt a liquidity risk management program beginning on December 1, 2018. The rule requires each fund to assess liquidity risk and classify assets into one of four buckets: highly liquid, moderately liquid, less liquid, and illiquid. However, many felt that the initial ruleset, particularly the so-called “liquidity bucket” provisions didn’t go far enough to guide fund managers on their obligations.
November’s US Treasury report on asset management addressed the SEC liquidity rule explicitly. Treasury recommends postponing the scheduled December 2018 implementation date and suggests a revision of the rule in the interim. Their feedback must now be assessed by the SEC, which leaves both the final rules and implementation date uncertain.
Rules Being Revised
The Volcker Rule: One of the most restrictive parts of the Dodd-Frank Act is the Volcker Rule which bans proprietary trading by certain financial institutions. November’s Treasury report also requests that agencies continue to refrain from enforcing proprietary trading restrictions against foreign funds until a permanent solution is found. This impacts US institutions who have non-US funds, like UCITS.
Treasury further proposes rewriting the regulation to revoke the rule completely for banks that have less than $10 billion in assets and allow proprietary trading for larger banks within certain limits that have not yet been determined. It is also revising the amounts financial firms can invest in hedge funds and private equity. Treasury also is rewriting the definition of prop trading to permit more trading on a client’s behalf, and loosening compliance regulations.
An interesting component of the Volcker Rule is that five different US regulatory agencies are responsible for it: The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Commodity Futures Trading Commission (CFTC), and the SEC. Therefore, any change to Volcker will receive attention from several different stakeholders.
Systematically Important Financial Institutions (SIFIs): Dodd-Frank established the Financial Stability Oversight Council (FSOC) to designate bank holding companies with more than $50 billion in assets and non-bank financial institutions as SIFIs if their failure posed a threat to the country’s financial stability. There are many efforts to revise or abolish these rules. The Financial Choice Act, which has been approved by the US House of Representatives, would require FSOC to dispense the $50 billion threshold for banks and instead assess whether medium-sized banks pose a systemic threat. It would also repeal FSOC’s authority to designate non-bank SIFIs and FMUs and repeal of the FSCO’s existing designations.
Exchange Traded Fund Rules: There are currently no specific rules relating to ETFs in the US. Instead, asset managers are required to seek exemptions from the Investment Company Act of 1940 each time they want to launch a new ETF. The SEC currently considers each new ETF on a case-by-case basis. Now, the SEC is writing new rules setting clear guidelines for issuance and supervision of ETFs, which would reduce the time and cost to market for new entrants.
The SEC has a busy year ahead. In addition to the ETF assessment, they will look to conclude reporting modernization, and evaluate the advancement of derivative rules and business continuity planning, some of the initiatives started under Jay Clayton’s predecessor, Mary Jo White.
Consumer Financial Protection Bureau (CFPB): Established under Dodd-Frank, the CFPB has been a point of industry debate since its inception due to its sweeping oversight powers. On November 24, the Obama-appointed director, Richard Cordray, resigned and appointed his chief of staff, Leandra English, as acting director. At the same time, the White House named Budget Director Mick Mulvaney, a sharp critic of the CFPB, as the CFPB’s interim director. On November 28, a federal judge ruled in favor of the Trump administration’s appointment. Ms. English has filed a lawsuit seeking to overturn the decision. The future of the agency remains under scrutiny.
Stop, delay, revise, go! Given the complexity of US regulatory agencies and government approvals, it is not easy to materially adjust existing or in-flight rules. Looking ahead, US asset managers are experiencing a period of flux and debate about recalibration of many existing and still to be implemented rules. Throughout 2018, it will be more important than ever to stay close to these evolving and fluid debates as they come towards conclusion.