Speaking last month on “The SEC’s New Fund Reporting and Liquidity Rules: What Do They Mean for the Fund Industry,” in Boston, MA, Investment Company Institute (ICI) President and CEO Paul Schott Stevens, noted that the world, post-US election, is wondering what the results will mean for them.
To that he offered the following thoughts from ICI’s perspective on how the current political climate will affect the course of financial regulation, particularly in the implications for funds, their managers, and the investors they serve.
With 2008’s recession nearly a decade old, and Dodd-Frank now six years old, it once appeared that the wave of rulemaking unleashed by those events showed no signs of cresting. In the past 12 months of the ICI’s fiscal year ending in September, he reported that the Institute submitted 111 comment letters, totaling more than 1,600 pages. That is almost one letter every other working day, filed with an alphabet soup of agencies, councils, and boards in the US and around the globe.
“I cannot remember a time in the 23 years since I first worked at ICI when our regulatory agenda has been more extensive or more consequential for the future,” but, he added, “this is not just affecting the fund industry. Take a look at the Federal Register. It published 80,260 pages of executive orders and proposed and final regulations in 2015. And as of Tuesday, the 2016 Register was within a few hundred pages of that total—with every indication that in its final year, the Obama Administration will top the record pace of 2010, the immediate aftermath of the financial crisis.”
Stevens noted that President-elect Trump, Speaker Ryan, and Majority Leader McConnell have all pledged to stem, or even reverse, the regulatory momentum. But in the area of financial regulation, he added, that “it seems clear to me—and to many thoughtful policymakers on both sides of the partisan aisle—that we need to pause and take stock. We need an opportunity to re-examine the appropriateness of many ongoing regulatory initiatives,” including the Department of Labor’s fiduciary duty rule and the FSOC’s authority to designate non-bank financial institutions as “systemically important.” Additionally, he called for a critical assessment of the need for additional rules that are in the pipeline.
According to Stevens, the ICI is calling for efficient, effective regulation, “as a necessary component for building trust among investors. Without that trust,” he says, “[funds] could not operate. The success of our industry—as reflected in the $18 trillion in assets we manage for 95 million American shareholders—depends on sound regulation.”
While underscoring the ICI’s commitment to ensure that “financial professionals should act in the best interest of their clients when offering personalized investment advice,” he urged taking a closer look at the following two regulations specifically:
#1: The Department of Labor’s (DOL) redefinition of fiduciary duty for brokers and advisers who serve retirement savers. The DOL’s “best interest standard” he said, is being imposed “through a complicated, back-door regulatory regime that will impose significant new liability on those serving retirement savers. The final rule will have the effect of limiting available advice options for many savers.”
With key implementation steps for the rule looming in April, Stevens reported that time is short for action, either by the incoming Administration or by Congress. But the ICI urges action “to ensure that savers can get financial advice that serves their best interests, yet is accessible and affordable.”
#2: Financial stability regulation. Stevens is concerned that post-financial crisis, “policymakers…have pursued a single-minded goal of financial stability,” in essence, attempting “to wring all sources of risk out of the financial system,” which unfortunately, he added, “threatens to put at risk [such] objectives as growth, and innovation, and opportunity.”
While Stevens agrees that the 2008 financial crises spotlighted weaknesses demanding reform, “funds that invest in stocks and bonds rode out the financial crisis without incident. The value of fund shares fell sharply, in line with the markets in which they invested. But these funds did not experience investor flight, heavy redemptions, operational disruptions, or other problems that could have exacerbated the financial crisis.”
Rather, he continued, in the 76-year history of the modern fund industry:
Instead, he noted, the empirical record demonstrates that regulated funds pose no threat to financial stability. And there is no reasoned case to be made that funds need to be designated as systemically important financial institutions—like banks—or to be subjected to capital standards, macro-prudential rules, or other bank-style regulations.
In December 2014, he said, SEC Chair Mary Jo White took on the challenge of reforming fund regulation in a number of areas that could potentially affect financial stability. The two rules Stevens noted are the fruits of that effort.
According to Stevens, the ICI has supported Chair White’s agenda and believes that regulation of asset management should be led by regulators, like the SEC and its counterparts in the International Organization of Securities Commissions, with expertise and experience in the capital markets. Oversight should not come, he urged, at the hands of banking regulators. Rather, it should be at the direction of entities like the SEC subject to administrative procedures that ensure robust consultation with the public and the regulated industry—so that rulemaking can be informed by real-world data, experience, and perspective.
If Stevens is correct, the regulatory bodies are not just going to ride off into the sunset. So, the moral of this story is to:
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