In our last OnTheRegs blog, we laid out in broad strokes the likely direction of the Biden Administration in terms of financial regulation. His agency appointments indicate a preference for experience with a view to hitting the ground running on their briefs and likely a more detail-centric approach to rulemaking than we have seen in the past four years. We do not expect a large degree of new rules or rollback of prior, but rather revisiting and revision to ensure they have a greater level of prescription than before. Current rules will be enforced more forcefully and a more muscular approach to SEC inspections and enforcement is expected too.
Here, we expand on this and look at some of the specific areas of rulemaking we are likely to see at the SEC and the how asset managers in the U.S. could be impacted.
Here We Go Again: SEC Regulation Best Interest
The U.S. funds industry has been focused on framing an acceptable “fiduciary standard” for more than 20 years. Last year, both the SEC and Department of Labor moved once more to conclude this long running regulatory saga.
The SEC Regulation Best Interest is a principles-based rule that prohibits brokers from placing their own interests ahead of their customers. However, the rule still stopped short in the eyes of certain advisors, investor advocates, and state securities regulators of meeting the “fiduciary standard” imposed on investment advisors.
There does not appear to be the stomach to revoke and fully revise the SEC Reg BI, particularly because most firms have now made the adjustments required to meet the rule. However, it is likely that the SEC will look to bring a greater degree of certainty to how the rule is applied universally through a number of policy levers available to them including:
- Compliance Examinations and enforcement actions
- Supplementary industry Guidance and prescriptive Q&A for market participants
- Targeted revisions of components of the rule (e.g.: an overhaul of the Form CRS)
Although the SEC is likely to be supported with additional resources, there are more than 12,000 registered investment advisors (RIAs) who fall under the rule scattered across the United States. With an ongoing pandemic, examination of all of these with so many other policy priorities competing will be a large consideration of the SEC as well.
U.S. joins the Global ESG Party
Addressing climate change has long been heralded as a goal of the Biden Administration, and he has wasted no time in addressing the issue. On his very first day in office, the president signed an Executive Order committing to the United States return to the Paris Climate Accord and another revoking a permit previously granted for the controversial Keystone XL pipeline. President Biden said of returning to the Paris agreement: "We are going to combat climate change in a way we have not done so far."
It is further reported that the administration continue to consider a further executive order that will compel U.S. public companies to disclose climate-related financial risks and greenhouse gas emissions data matching policies that are already coming on stream in Europe and elsewhere.
Another recent rule likely to come under deeper scrutiny, is the DOL’s ESG Rule. That rule came into effect on January 12th but is likely to be revisited. The most likely paths are further interpretative guidance in the short term and possibly a rewrite in the longer term. Because the DOL is brand new, a live option open to the new administration is to utilize the Congressional Review Act to reverse the rule completely. Reversing the rule is the more dramatic option but cannot be ruled out given many investors and ESG advocates believe the DOL’s pecuniary standard is a barrier to ESG adoption in ERISA plans.
This climate focus may also find its way into the SEC, and the agency may at least engage with industry on framing rules that require ESG disclosures for U.S. funds to be standardized. Sitting Democratic commissioner and acting SEC chair, Allison Herren Lee has previously called for ESG disclosure standards for issuers and financial firm disclosures. So, Gensler might be pushing an ESG door that is already ajar.
Revisit and Revise
There really are a whole range of issues that the new SEC commission could look to return to in the spirit of wanting tighter more perspective rules that better protect investors, and too many to portent in any detail here. However, the list of candidates for rules that could come under the SEC revisit and revise purview within 2021 include:
- Derivatives Rule (including inverse and leveraged ETFs)
- Advertising Rule
- Accredited Investor definition
- Proxy Voting
- Money Market Fund Rules
There could be greater levels of prescription through additional guidance, or they could engage with industry as a result of their inspection and enforcement programs. We could expect more frequent Risk Alerts from the SEC’s Office of Compliance Inspections and Examinations (OCIE) under Gensler’s watch.
Regardless of which rules are passed or revised, the string to the SEC’s bow will be a stronger enforcement focus than the current administration. As a rule of thumb, Democrat-led SECs have tended to produce tougher and more frequent rules and enforcement actions than Republican ones. With Gensler’s reputation proceeding him, it is expected that both inspections and enforcement will rise on his watch. The Biden administration is likely to happily fund the additional resources needed to ensure this enforcement focus is ensured. The SEC previously had a hiring freeze imposed, but if the SEC and other agencies are to be empowered to elevate investor protection, then they will need to be give the tools and bodies to fulfill that goal. This focus might add to an already full plate for the compliance divisions of US asset managers.
What is unquestionable is that regardless of the lack of new rules and regulations, 2021 will remain a vibrant year at the SEC and the other U.S. regulatory agencies.