德勤：2023年投资管理监管展望_20页_4mb

2023 Regulatory Agenda Summary: Investment Management Industry

Core Content

The investment management industry is facing a significant regulatory transformation in 2023, driven by three main themes: regulatory churn, reinvigorated enforcement, and regulatory initiatives on the horizon. These changes are expected to impact firms in profound and unpredictable ways, requiring a strategic approach to compliance and operational readiness.

Main Themes

1. Regulatory Churn

• Volume of Proposals: In 2022, the SEC approved over 30 rule proposals, leading to a high level of uncertainty for firms.
• Uncertainty Factors:
  • SEC Leadership: Chair Gary Gensler's vision for regulatory change may influence the finalization of proposals.
  • Legal Challenges: Anticipated legal battles, especially over controversial rules, could delay or alter the implementation of proposals.
• Impact on Firms: The uncertainty could create long-term risks and operational challenges, necessitating proactive planning.

2. Reinvigorated Enforcement

• Increased Enforcement Actions: The SEC saw a 9% increase in enforcement actions in 2022.
• Focus Areas: Enforcement is being applied not only to new rules but also to existing regulations in areas like ESG investing and cybersecurity.
• Compliance Pressure: Firms are under heightened expectations to comply with current standards, even before new rules are finalized.
• Enforcement in 2023: The SEC may bring enforcement actions against firms with severe noncompliance, especially in areas like the IA Marketing Rule and Electronic Communications.

3. Regulatory Horizon

• New Topics: The SEC is expected to introduce new regulations on digital engagement practices and diversity, equity, and inclusion (DEI).
• Outsourcing: The SEC is examining the regulation of outsourcing by investment advisers, which may affect how firms manage their operations and compliance.

Key Regulatory Proposals

A. Swing Pricing

• Purpose: To reduce shareholder dilution and prevent runs in times of stress.
• Proposals:
  • Money Market Funds: Requires swing pricing and increases liquidity requirements.
  • Open-End Funds: Imposes swing pricing and requires a hard close for orders.
• Impact: Increases operational complexity and data requirements. May affect intermediaries like broker-dealers and banks.

B. ESG Disclosure

• Proposals:
  • ESG Disclosure Standards: Requires specific ESG-related disclosures in prospectuses, annual reports, and adviser brochures.
  • Three ESG Fund Types:
    1. Integration Funds: Consider ESG factors alongside non-ESG factors.
    2. ESG-Focused Funds: Use ESG factors as a significant consideration in investment decisions.
    3. Impact Funds: Aim to achieve specific ESG impacts or benefits.
• Compliance Requirements:
  • One-year compliance period for most requirements.
  • 18-month implementation period for annual shareholder report disclosures.
• Challenges:
  • Requires firms to classify funds and document strategies.
  • Need for reliable ESG data sources and internal controls.

C. Fund Names Rule

• Proposals:
  • Expands the 80% investment policy requirement to fund names that suggest a focus on ESG.
  • Prohibits funds that consider ESG factors "alongside but not more centrally" from using ESG terminology.
  • Incorporates business development companies (BDCs) into the definition of "fund."
  • Requires the use of notional amount of derivatives for compliance.
• Compliance Period: One year from the effective date of the final rule.
• Actions for Firms:
  • Conduct gap assessments.
  • Review and update fund names and strategies.
  • Develop clear definitions for fund names in prospectuses.

D. Cybersecurity Rules

• Proposals:
  • Cyber Risk Management: Requires implementation of cybersecurity policies and procedures.
  • Incident Reporting: Mandates reporting of significant cyber incidents within 48 hours via new Form ADV-C.
  • Disclosure: Requires disclosure of cybersecurity risks and incidents to investors and market participants.
  • Record-Keeping: Mandates maintenance of cybersecurity-related records.
• Compliance Expectations:
  • Firms must consider cybersecurity risks from third-party service providers.
  • Align with the SEC's 2020 "Cybersecurity and Resiliency Observations" report.
• Actions for Firms:
  • Elevate cybersecurity governance.
  • Conduct gap assessments against leading practices.
  • Implement written policies and procedures.
  • Accelerate cybersecurity posture improvements.
  • Conduct tabletop exercises to test incident response.

E. Section 15(c) and 36(b) Compliance

• Section 36(b): Establishes a fiduciary duty for investment advisers regarding compensation and material payments from fund clients.
• Section 15(c): Involves the allocation of expenses and tracking of revenue.
• Current Status:
  • No successful Section 36(b) cases have been brought to date.
  • The SEC is expected to increase scrutiny in these areas.
• Actions for Firms:
  • Conduct a comprehensive review of fee structures and expense allocations.
  • Ensure transparency in sub-adviser and intermediary payments.
  • Review and enhance board reporting and documentation.

Summary of Actions for Firms

• Assess Regulatory Impact: Understand which proposals are likely to be finalized and evaluate their impact on operations and compliance.
• Gap Assessments:
  • Conduct assessments for ESG, cybersecurity, and fund names.
  • Evaluate compliance programs against leading practices.
• Documentation and Transparency:
  • Document fund strategies, ESG disclosures, and cybersecurity policies.
  • Ensure transparency in fee structures, expense allocations, and payments.
• Technology and Systems:
  • Enhance electronic communications record-keeping and monitoring capabilities.
  • Use AI and machine learning for enhanced surveillance and analytics.
• Internal Controls:
  • Develop and implement internal controls for compliance with new rules.
  • Establish teams responsible for cybersecurity and ESG compliance.
  • Ensure that policies and procedures are clear, consistent, and aligned with regulatory expectations.

Conclusion

The 2023 regulatory agenda for the investment management industry is marked by a high volume of proposed rules, increased enforcement, and new regulatory topics. Firms must be proactive in assessing the impact of these changes, preparing for potential legal challenges, and ensuring that their compliance programs are robust and adaptable. Strategic planning, gap assessments, and enhanced internal controls are essential to navigating this complex and evolving regulatory landscape.