Securities Regulation Daily Wrap Up, SEC NEWS AND SPEECHES—PLI Institute holds investment professional, liquidity risk forum, (May 1, 2018)
Dalia Blass, the SEC’s Investment Management Division director,on April 30, 2018, discussed investment professional standards of conduct, and liquidity risk management at the PLI Investment Management Institute in New York. The Division’s effort, she said, in the form of a proposed rulemaking package for industry to comment on by May 18, 2018, was promulgated to better prepare main street investors for investing with broker-dealers and investment advisers.
Investment professionals’ standards of conduct. Blass’s remarks highlighted the Commission’s recently proposed rules on investment professional standards of conduct, which were drafted to bring the legal requirements and mandated disclosures for investment professionals in line with investor expectations. She delved into the three issues that arose from the rulemaking package: (1) providing clarity to retail investors about investment professionals; (2) raising the standard of conduct for broker-dealers; and (3) clarifying the standards of conduct for investment advisers.
To educate investors about whether the professional they are working with is a broker-dealer, an investment adviser, or both, Blass spotlighted a proposed requirement that firms provide investors with a newly created, Commission-designated "relationship summary." The relationship summary would disclose the key differences between a broker-dealer and investment adviser, specifically the different types of services they offer, the legal standards that apply to each, the fees customers would pay, and the conflict of interests that might occur between the professionals and investors. Additionally, broker-dealers and investment advisers would need to include relevant questions for their investors to ask. Industry is already questioning the value of the relationship summary, a good thing Blass declared because it will generate meaningful follow up discussion of the subject.
The proposals, Blass said, would not rely on disclosure alone to educate investors, but through a new Regulation—Regulation Best Interest (or "Reg. BI")—would raise the bar on how broker-dealers must treat their customers. Reg. BI would create an Exchange Act duty for broker-dealers to act in the retail customers’ best interests above the broker-dealers’ own interests. Simultaneously, the proposal would preserve the pay-as-you-go broker-dealer model by recognizing how it differs from the investment adviser model. Blass specified that Reg. BI’s duties are tied to each broker-dealer-made recommendation to a customer whereas an investment adviser’s fiduciary duty applies to the adviser’s ongoing relationship with a client.
Similar to Reg. BI for broker-dealers would be an SEC proposed interpretation reaffirming an investment adviser’s commitment to act in the advisory clients’ best interests (above the adviser’s own interests), as well reaffirming the adviser’sduty of care and loyalty owed to clients. The proposed interpretation, Blass proclaimed, would also reiterate the requirement that advisersfully and fairly disclose to their clients all material conflicts of interest that could affect the advisory relationship.
Liquidity risk management. Blass summarized the history of liquidity risk management as follows:
The Commission,in 2016, adopted a rule requiring mutual funds to adopt liquidity risk management programs, updating and enhancing outdated guidance about the 15 percent illiquid investment limitation, and mandating the funds to classify the liquidity of each investment into one of four "liquidity buckets."
Among the projects initiated after the rule’s adoption were Division-recommended and Commission-proposed changes to the rule’s public reporting requirement. The adopted change required funds to publicly disclose every quarter on Form N-PORT theiraggregate fund "liquidity profile" or, in other words, the total percentage of their portfolio investments that fell into each of the four liquidity buckets.
The funds thereafter repeatedly complained that the inherently subjective nature of liquidity assessment could be misconstrued when presented in the manner required by the above amendment.
The Commission, addressing this fund concern, issued a proposal in March 2018 to replace disclosing publicly aggregated liquidity buckets with a new requirement that funds discusstheir liquidity risk management programs in their annual shareholder reports. And to further inform investors and the markets of fund liquidity risk profiles, the Commission staff proposed publishing anonymized, aggregate data in a report similar to the staff’s reports on Form PF.
Blass closed by asking the PLI Institute attendees to comment on the proposed rulemaking package by May 18.
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