REGULATION

Next on the SEC's Regulatory Agenda: A Chief Valuation Officer?

First, the SEC required funds to designate a chief compliance officer. Then, the SEC proposed that funds designate a liquidity risk manager and, after that, a derivatives risk manager. Can a chief valuation officer ("CVO") be far behind?

Looking into our crystal ball, this may be possible, especially since the regulatory model is already in place. For a discussion and analysis, a Learning Curve article written by Jay Baris is available here.

FinCEN Finalizes Customer Due Diligence Rule for Legal Entity Customers

The Financial Crimes Enforcement Network ("FinCEN"), a bureau of the Department of the Treasury, recently published a Final Rule (the "Rule") on customer due diligence after a four-year rulemaking process. The Rule requires covered financial institutions, including banks, money services businesses, broker-dealers, mutual funds, and commodities brokers, to enhance their customer due diligence procedures by collecting and verifying information about the individuals who own or control the legal entity customers of the financial institution. These individuals are referred to in the Rule as "beneficial owners." The Rule also adds a "fifth pillar" to the minimum requirements of an anti-money laundering ("AML") compliance program by explicitly requiring financial institutions to develop and update customer risk profiles and customer information, and to conduct ongoing AML monitoring. As a concession to numerous commenters, the Rule provides a two-year compliance deadline instead of the one-year deadline in the proposed rule.

For additional discussion and analysis, our Client Alert is available here.

SEC Proposes Business Continuity and Transition Rules for Advisers While Staff Publishes Similar Guidance for Funds

The SEC's Division of Investment Management published regulatory guidance highlighting the need for registered investment company complexes to review their business continuity plans to ensure that they are sufficiently robust to mitigate potential exposures and disruptions and consider the backup processes and redundancies of critical service providers. On the same day, the SEC proposed rules that would require registered investment advisers to adopt and implement business continuity and transition plans reasonably designed to address risks related to an adviser's ability to operate in the event of a significant disruption.

For additional discussion and analysis, our blog post is available here.

The Metaphysics of Systemic Risk

The Financial Stability Oversight Council ("FSOC") again warned that asset managers present systemic risk to financial stability in five key areas:

  • liquidity and redemptions;
  • leverage;
  • operational functions;
  • securities lending; and
  • resolvability and transition planning.

In a 27-page statement, the FSOC detailed its concerns and how regulators should respond to those risks.

In response, SEC Chair Mary Jo White, who also serves as a member of the FSOC, said she supported the FSOC's efforts, which she characterized as "complementary" to the SEC's current regulatory initiatives. She noted that the SEC evaluates systemic risks in reliance on its own studies by its Division of Economic and Risk Analysis ("DERA") and has responded with its own rule proposals independent of the FSOC's analysis.

For additional discussion and analysis, a Law360 article written by Jay Baris and Oliver Ireland is available here.

SEC Chair White to FSOC: We're On It

In a recent keynote address before the Investment Company Institute, SEC Chair Mary Jo White signaled to the Financial Stability Oversight Council ("FSOC") that the SEC is "working hard" to finalize rules that address potential systemic risks in asset management.

The reminder follows FSOC's recent statements that it continues to focus on systemic risks in certain asset management products, and in advance of an anticipated statement by the Financial Stability Board ("FSB") on the same topic. Chair White noted that the SEC is finalizing proposed rules on fund reporting, liquidity risk management, and fund use of derivatives, which, among other things, are issues that FSOC and the FSB have publicly raised.

For additional discussion and analysis, our blog post is available here.

SEC Eases Regulatory Burden for Listing Actively Managed ETFs

The SEC recently took a step toward streamlining the approval process for actively managed ETFs by approving rule proposals from two securities exchanges.

The order issued to BATS Exchange, Inc. ("BATS") allows BATS to adopt "generic listing standards" for actively managed ETFs. Up until now, generic listing standards applied only to passively managed ETFs that track an index.

The SEC issued a similar order to NYSE Arca, Inc.

This regulatory relief, originally proposed by the exchanges in November 2015, effectively removes a hurdle that actively managed ETFs faced when applying for a listing on the exchange.

For additional discussion and analysis, our blog post is available here.

To read our Newsletter in full, please click here..

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved