Investment Management Updates November 2021

Investment Management, Trading & Markets Updates – November 2021

SEC Chair’s Senate Committee Testimony on SEC Initiatives

On October 5, 2021, SEC Chair Gary Gensler provided testimony to the U.S. House of Representatives Committee on Financial Services. Several of the initiatives are of interest to the investment management industry and are summarized below.

ESG Disclosure. Gensler mentioned that the SEC has seen “a growing number of funds market themselves as ‘green,’ ‘sustainable,’ ‘low-carbon,’ and so on.” He has asked the SEC staff to consider ways to determine what “information stands behind those claims” and how the SEC can ensure that “the public has the information they need to understand their investment choices among these types of funds.”

Cybersecurity. The SEC staff is in the process of developing a proposal for the SEC’s consideration on cybersecurity risk governance, which could include “cyber hygiene and incident reporting.”

Private Fund Disclosure. Gensler observed that private fund managers face conflicts of interest regarding information they are providing investors about the fees they charge. He noted that the SEC can enhance disclosures in this area, “enabling pensions and others investing in these private funds to get the information they need to make investment decisions.”

Money Market Funds and Bond Mutual Funds. Gensler noted that, following the challenges of the spring of 2020, the SEC “can build greater resiliency in both money market funds and open-end bond funds.” He has asked the SEC staff for recommendations to address resiliency during times of stress, based upon “feedback [the SEC] received on the President’s Working Group report as well as other information.”

Security-Based Swaps Disclosure. Gensler observed that total return swaps were at the heart of the recent failure of Archegos Capital Management, a family office. He noted that (1) under Section 10B of the Exchange Act, Congress provided the SEC with authority to mandate disclosure for positions in security-based swaps and related securities; and (2) he has asked the SEC staff to consider potential rulemaking under this authority so that the SEC can see positions in security-based swaps and related securities. He stated, “[a]s the collapse of Archegos showed, this may be an important reform to consider.”

Crypto Assets Market. Gensler has asked the SEC staff to look at ways to enhance investor protection “in crypto finance, issuance, trading, or lending,” which he compared to “the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.” He has instructed the SEC staff, working with other regulators, to work along two tracks to address (1) how the SEC, with other financial regulators under current authorities, can best bring investor protection to these markets; and (2) how Congress can help fill regulatory gaps.

SEC Proposes to Enhance Proxy Voting Disclosure by Investment Funds and Require Disclosure of “Say-on-Pay” Votes for Institutional Investment Managers

On September 29, 2021, the SEC proposed amendments to Form N-PX to improve the information that mutual funds, exchange-traded funds, and certain other funds report about their proxy votes. The proposed rulemaking would require funds to tie the description of each voting matter to the issuer’s form of proxy and to categorize every matter by type to assist investors in identifying votes of interest and compare voting records. The proposal would also prescribe the manner funds organize their reports and require them to use a structured data language to make the filings simpler to analyze. Funds would also be required to disclose how their securities lending activity impacted their voting. 

SEC Requests Information and Comment on Broker-Dealer and Investment Adviser Digital Engagement Practices 
On August 27, 2021, the SEC announced that it is requesting information and public comment on matters related to the use of digital engagement practices by broker-dealers and investment advisers. These tools include differential marketing, behavioral prompts, game-like features, and other design elements of features designed to engage with retail investors on digital platforms (e.g., websites, portals, and applications), as well as the analytical and technological tools and methods (collectively called digital engagement practices (DEPs)). 

Extension of Relief from the On-Site Annual Inspection of Branch Offices and Guaranteed IBs
Due to COVID-19, the National Futures Association (NFA) allowed members to conduct all calendar year 2020 annual inspections of branch offices and guaranteed introducing brokers (IB) remotely. The NFA believes that members may find it difficult to complete on-site annual inspections for calendar year 2021 since their staffs may be in various stages of transitioning back to the office or still working remotely. Therefore, the NFA is extending the relief provided in Notice I-20-35 through the end of 2021. While members are required to conduct the required annual inspection of each branch office and guaranteed IB by December 31, 2021, each firm may conduct these inspections remotely. A member that conducts a remote examination in 2021 based on this relief may still conduct a remote examination in 2022 if its risk assessment indicates it is appropriate to do so. This risk assessment should take into account that the firm conducted the exam remotely the prior two years.

SEC Chair Provides Remarks on Crypto Assets at the Aspen Security Forum

On August 3, 2021, SEC Chair Gary Gensler gave remarks at the Aspen Security Forum on the current state of U.S. crypto asset regulation. While Gensler acknowledged the contributions crypto assets and blockchain technology have made to financial and monetary innovation, he also highlighted the immediate need for investor protection in light of the publicity, fraud, scams, and abuses in the crypto-asset space that has caused harm to investors. 

Gensler discussed the protections that existing U.S. securities laws provide, particularly for initial coin offerings, many of which have been subject to SEC enforcement action as offerings of unregistered securities. He warned that significant investor protection gaps exist in foreign crypto trading platforms and decentralized finance platforms that purport to prohibit U.S. investors, but through which unregulated trading by U.S. investors is possible. Gensler also expressed concerns about “stablecoins,” a type of crypto asset whose value is pegged to a reference asset, typically a currency such as the U.S. dollar, noting the potential use of such assets to evade public policy goals such as anti-money laundering, tax compliance, and sanctions and suggested that some stablecoins may need to be registered both as investment companies and securities. 

Gensler stated that in light of the significant investor protections provided by the Investment Company Act, he looked forward to the staff’s review of filings to offer cryptocurrency-related exchange-traded funds, specifically those investing in CME bitcoin futures. Gensler ended his remarks by emphasizing further congressional action is needed to close regulatory gaps in crypto transactions, products, and platforms. He noted crypto-asset regulation is important not only to protect investors but also to encourage innovation and protect national security. 

Bipartisan Bill Would Allow Retail Investment in Closed-End Funds Investing in Private Funds and Close Activist Investor Loophole

On June 30, 2021, Rep. Anthony Gonzalez (R–OH) and Rep. Gregory Meeks (D–NY) introduced a new bill that would allow certain retail investors to invest in private securities through closed-end funds. The SEC staff guidance currently prohibits a closed-end fund from investing more than 15% of its assets in private funds unless the closed-end fund sells its interests to only accredited investors with a minimum initial investment of at least $25,000. The Increasing Investor Opportunities Act would override the SEC staff guidance by introducing its own prohibition on limiting a closed-end fund from investing any or all of its assets in private funds. Additionally, the bill aims to protect closed-end funds from actions by private activist investors by requiring private funds to comply with the same investment limitations and aggregation requirements imposed on registered funds under Section 12(d)(1)(C) of the Investment Company Act of 1940, which would limit a group of affiliated private funds to owning no more than 10% of a closed-end fund’s outstanding voting securities.

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