Developments and market trends in North America
Global | Publication | December 2016
Author Steven Howard
The SEC's final fund regulations under Chair White focus on liquidity, enhanced shareholder disclosures and swing pricing.
SEC Chair Mary Jo White announced that her tenure will end on January 20, 2017 with the end of the Obama Administration.
President-elect Donald Trump has not yet announced his appointment. The US securities industry generally expects Trump’s selection to be a high level Wall Streeter who will seek to lessen securities regulations and rescind the burdensome aspects of the Dodd-Frank regulations.
With Chair White’s departure, Trump will have three commissioner vacancies to fill which constitutes a majority.
As part of its continuing initiative to enhance monitoring and regulation in the investment management industry, the Securities and Exchange Commission (SEC) issued three new rules on October 13, 2016: Investment Company Liquidity Risk Management Programs, Investment Company Reporting Modernization, and Investment Company Swing Pricing.
New Rule 22e-4 requires open-end funds (including ETFs, but excluding money market funds) to establish and adopt liquidity risk management programs that include the following key items:
Assessment, management and periodic review of an open-end fund’s liquidity risk and its ability to meet redemption requests without significant dilution to remaining shareholders.
Liquidity classification of each fund investment, into the following four liquidity categories based on the number of days the investment could be expected to be converted to cash: highly liquid, moderately liquid, less liquid and illiquid.
Determination of a highly liquid investment where minimum assets must be invested in highly liquid investments and adoption of policies to respond to and report shortfalls.
Board approval of liquidity risk programs and at least an annual board review of the program’s effectiveness.
Requirement that illiquid investments will be subject to a 15% limitation, with the definition of liquidity being further enhanced in accordance with the new classifications that are part of the Rule.
Confidential filing of Form N-LIQUID with the SEC when illiquid assets exceed the fund’s policy of the 15% limitation or when the highly liquid investments fall below the minimum.
To enhance transparency, modernize reporting information and improve the quality and type of information disclosed to investors and the SEC, the SEC adopted various new rules and amendments to existing rules requiring the following:
New Form N-PORT will replace form N-Q and report portfolio-wide and position-level investments on a monthly basis. This will include data related to pricing, information regarding securities lending, repo agreements, terms of derivative contracts and counter-party exposure.
New Form N-CEN will replace Form N-SAR and will be filed annually, 75 days after year-end. This will provide information regarding service providers, securities lending and other disclosures to shareholders.
Amendments to Regulation S-X and Form N-1A will require enhanced and more standardized disclosure concerning derivative holdings, securities lending and shareholder disclosures information.
Compliance dates for liquidity risk management are December 1, 2018, for fund complexes with $1 billion or more in net assets, and June 1, 2019, for fund complexes less than $1 billion in net assets.
Fund complexes with net assets of $1 billion or more will be required to begin filing reports on new Forms N-PORT and N-CEN after June 1, 2018, while fund complexes with less than $1 billion in net assets will be required to begin filing reports on Form N-PORT after June 1, 2019. The changes to Regulation S-X and form N-1A will take effect on August 1, 2017.
A rule amendment will permit (but not require) open-end funds (excluding ETFs and money market funds) to use “swing pricing” to mitigate the dilution to existing shareholders from transaction-related costs incurred by a fund when investing proceeds from subscriptions or selling assets to meet redemptions. An open-end fund must establish policies and procedures related to swing thresholds and upper limits on swing factors which are not to exceed 2% of net asset value per share. The policies must be approved and periodically reviewed by the board and require certain disclosures to shareholders. Open-end funds will not be permitted to use swing pricing until two years after publication of the amendment in the Federal Register.
Author Steven Howard
The US Administrative Procedure Act which governs all US federal agencies provides the basis for rapid deregulation of the US Government, and President Trump will strive to downsize the Government like no previous President. All without the involvement of the US Congress!
In 1762 Jean-Jacques Rousseau wrote the following immortal words that launched the Age of Revolution throughout Europe and America (somewhat contemporized):
“Man is born free and everywhere he is in the chains of excessive regulation!” In America in this last month of 2016 before the beginning of the Trump Presidential Administration in January 2017, we are on the eve of a deregulatory revolution that will be unprecedented in American history. Not since the birth of the Modern Administrative State 80 years ago in the 1930s under FDR’s Administration has there been a President who has the desire and the political clout to significantly reduce the excessive regulations that the federal bureaucracy has spawned and thrived on for those 80 years.
President–elect Trump is not beholden to any political party, patron, constituency, lobbying group or ideology. Both houses of Congress are controlled by the Republican Party, so his Cabinet appointments will be readily confirmed. And, with those Cabinet members installed in their offices comes their authority under the Administrative Procedure Act (the APA) to significantly reduce federal regulation without any Congressional or judicial review. It is not widely understood or appreciated that more than 90% of business regulations in the US is promulgated and adopted in accordance with the public notice and agency review procedures set forth in the APA. Those business regulations are not enacted by the US Congress. Take the Dodd-Frank Act for instance. In its haste, Congress passed a skeletal framework of loosely defined concepts in 2010 in the wake of the Great Recession, and in so doing, massively delegated to the federal administrative agencies, like the SEC, CFTC, FINRA and the Comptroller of the Currency, the vast authority to promulgate and adopt 100s of regulations in order to put skin on the bones of their enacted and emaciated skeleton. While the Dodd-Frank Act cannot be repealed without an act of the US Congress, it is not necessary to enact a Dodd-Frank repeal in order to gut the statute. All of the vast regulations that are essential for its legal authority can be rescinded by each federal administrative agency in a 60 to 90 day APA process without any Congressional action. Including, the so-called Volcker Rule which seeks to prohibit proprietary trading by US banks and has been vehemently opposed by most money-center banks in the US.
The SEC is at the core of asset management regulation in the US. The Chair of the 5 Commissioner SEC has tendered her resignation which will allow President Trump to appoint a majority of three Commissioners to the SEC. Once installed, the SEC under the APA has the legal authority to rescind all of the 100s of rules that it adopted in the wake of the Great Recession without any Congressional review, subject to a perfunctory 60 to 90 day notice and comment process. Prior to the November election, the general expectation in the US securities industry was that the SEC would enact a new and vigorous fiduciary standard for broker-dealers throughout the US. It is now hard to imagine that there will be any new significant securities regulations in the US at all for at least the next 4 years, let alone a new fiduciary standard for broker-dealers.
Unlike the SEC which has a governing Commission, the Department of Labor (the DOL) does not have a board or commission. Regulatory power and authority is delegated to and centralized in the office of the Secretary of Labor, a Cabinet level appointment. As a consequence, the DOL Secretary has enormous authority with regard to pension assets and minimum wage standards. President-elect Trump has now appointed an international food chain executive who has publicly stated his vehement opposition to President Obama’s increase in minimum wages and overtime wages. The Obama wage increases are generally expected to be rescinded in January 2017 without any Congressional oversight or involvement. That executive has stated privately that he opposes the DOL’s newly (April 2016) adopted fiduciary standard for broker-dealers who manage or administer pension assets. It is widely expected that the new DOL fiduciary standard will be rescinded prior to its effectiveness date of April 10, 2017. Thus, the power of the APA in the hands of agency heads whose mission is to dismantle the Modern Administrative State. In the case of the DOL, the US Supreme Court strengthened the DOL’s power and authority in its landmark (but little noticed) case this past April 2016, Secretary of Labor Perez v. Mortgage Bankers Association, which in effect shields the DOL Secretary’s actions and rules from all judicial review.
The possible dismantling of the Environmental Protection Agency (the EPA) falls outside of the scope of this article because the EPA is not involved in asset management, but suffice it to say that President-elect Trump has appointed an EPA head who has for decades advocated the agency’s regulatory diminution, if not its wholesale dismantling.
There can be little doubt that after January 20, 2017 the US will be entering an era of significant deregulation unlike any era the US has ever experienced. Like it or not, the US is confronted with the following potentially dangerous paradox. In the words of Jean-Jacques Rousseau: “Left to themselves, the People always desire the Good, but left to themselves, the People do not always know where the Good resides.” For the next four years, President Trump and his appointees will decide for them.
Publication
On 6 September 2022, the European Commission (EC) prohibited Illumina’s acquisition of Grail, bringing to an end the administrative stage of a legal saga that has attracted interest beyond competition law specialists.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023
