In its third report in response to President Donald Trump’s Core Principles for the federal regulation of the US financial system published earlier this year (click here to access), the US Treasury Department discounted the benefits of entity-based systematic risk evaluations of large asset managers or their funds and instead recommended reviews of systemic risks arising from specific products and activities. Entity-based systematic risk evaluations are required under a provision of law enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act for investment companies and investment advisers with more than US $10 billion of assets, but have yet to be mandated by the Securities and Exchange Commission. (Click here to access 12 U.S.C. §5365 (i)(2)(A).)
The Treasury also called for amending rules of the Commodity Futures Trading Commission to avoid subjecting investment companies and their advisers registered with the Securities and Exchange Commission to registration and oversight by the CFTC as commodity pool operators. To the extent an SEC registrant acts as a commodity pool and might be insufficiently overseen, the Treasury asked that the SEC and CFTC recommend a sole regulator so that such entities remain solely regulated by the SEC or transferred to the sole purview of the CFTC.
The third Treasury report addressed issues both with asset management and insurance. Among the Treasury’s other 61 recommendations were that:
- the SEC reconsider what portfolio limits, if any, should be implemented as part of any rule related to authorized derivatives transactions by regulated funds to avoid unnecessarily restricting funds from using derivatives even for hedging purposes;
- the SEC, CFTC, self-regulatory organizations and other regulators coordinate to “rationalize and harmonize” reporting requirements to combine duplicative forms and eradicate unnecessary or inconsistent data; and
- the Department of Labor reconsider the impact of its April 2016 expansion of the definition of a fiduciary on investors. This process of reconsideration, including standards of conduct for fiduciaries, should include input by the SEC and other regulators.
The Treasury’s first report, issued in June, addressed the depository system, including banks, savings associations and credit unions, and proposed substantial amendments to the Volcker Rule. The Treasury’s second report, issued earlier this month, offered 91 separate recommendations—many with subparts—for making US capital markets more competitive with foreign markets, as well as for making regulation of US capital markets more efficient and effective to foster economic growth. Among other things, the second report called for more coordination between the CFTC and SEC. (Click here for further background in the article “Treasury Calls for Better Coordination to Improve SEC and CFTC Efficiencies; Recommends Review of SROs to Minimize Conflicts and Increase Transparency” in the October 8, 2017 edition of Bridging the Week.)
My View: As with the prior Treasury Report regarding capital markets, most of the current Treasury recommendations regarding funds and asset managers appear reasonable and should be implemented. Most can be done so through regulatory tweaks or coordination and don’t require law changes. Both the CFTC and SEC should formally disclose their intentions regarding applicable recommendations, and how (and when) they might implement specific ideas.