Financial services regulation and COVID-19 video diaries: Issues affecting asset and fund managers

Hello everyone and welcome to this video diary in which I am going to focus on some issues arising out of the COVID-19 crisis, insofar as they affect asset and fund managers

The first thing to say is that there are many such issues: it’s in the nature of fund management that there are many parties to consider (managers, funds, investors, counterparties, service providers like brokers, custodians, depositaries and the like) – and each are affected in numerous ways.

Managers themselves are subject to a multitude of considerations and so this short video diary is the first of a few which will look at asset management impacts specifically.

In this video, though, I’m going to look at particular impacts on asset managers and their relationships and interactions with regulators. In later videos we’ll look at issues cropping up in the context of fund marketing, fund disclosures, and operational risk issues.

So what are some of the key considerations for asset managers, during this crisis, in relation to their interactions with regulators? Why don’t we start with Principle 11 and its equivalents elsewhere: a key point to remember is that AMs will likely be firefighting quite a bit and encountering issues and challenges in all sorts of areas, many of which may not have been foreseen.

It’s worth remembering that in the midst of all this, firm’s regulatory disclosure obligations under Principle 11 are still there and need to be complied with appropriately and in a timely fashion where issues crop up that the FCA, for example, would expect notice of.

As a linked point though, what we are seeing is a level of flex coming from regulators in terms of some of their expectations around regulatory reporting and other compliance requirements. In line with ESMA’s recent public statement, the FCA has agreed to allow firms to delay the publication of annual and half-yearly fund reports, allowing two extra months for annual reports and one for half-yearly reports.

Some regulators have extended filing deadlines, e.g. for filing financial statements, and there appears to be some flex with respect to transaction reporting and recording requirements – as well as practical issues around the use of electronic signatures rather than wet signatures in regulator applications, but firms should still try to continue with BAU as far as possible and check in case there are any restrictions / requirements attached to whatever flex is being provided.

To my mind the overall theme seems to be one of regulators acknowledging and being prepared to allow for a reasonable and appropriate level of flex, whilst still expecting managers to take alternative steps (like keeping written records where telephone recording isn’t possible) and effectively to try to achieve compliance as best they can in the circumstances – managers aren’t being given a free pass, that’s for sure.

And there are areas where we’re seeing additional scrutiny or other steps being taken by regulators. Some countries, for instance, have implemented bans or restrictions on short selling and ESMA has also, as we know, put in place more onerous reporting requirements for short positions.

We may also see increased scrutiny of asset managers and their activities as a more general outcome of market turbulence and distressed market conditions. It’s conceivable, for instance, that there may be renewed focus on things like the so-called asset stripping requirements under the AIFMD and on market conduct, disclosures by listed funds and fund managers of changes in their financial position under the Market Abuse Regulation and so on.

It’s also worth remembering that regulators themselves will be facing challenges at this time in terms of their own resource, and where to focus it. We may see regulators finding it tough to be as responsive as they may have been previously, depending on the priority level of the issue firms are seeking to interact with them on. We’ve seen PE managers acquiring regulated entities encountering timing issues for their transactions where, for instance, as part of the change of control process business plans and financial projections have had to be revised to take into account COVID-19 impacts.

And finally the actual business of supervision is being conducted in a new world now – with onsite visits just not being possible anymore. What regulators expect from fund managers and other firms alike in terms of demonstrating compliance in such an environment is evolving – but I think it’s fair to say that given the role asset managers perform and their interaction with investors, investees and the markets more widely we don’t expect to see regulators looking any less closely at asset managers in today’s environment even where there is some temporary flexibility in relation to the manner and timeframes in which asset managers comply with regulatory rules.