Ruminations on SEC Rulemaking

SEC Chair Gary Gensler’s ambitious plan for “modernizing” the capital market system via an aggressive rulemaking agenda may pose challenges for investment firms. Susan Olson, our Vice President of Government Relations hosts the Investment Company Institute’s (ICI) General Counsel - also named Susan Olson – to discuss SEC rules. Their insights provide an overview of the breadth of pending and impending rules, and an accelerated schedule.

The ICI is a leading association representing regulated investment funds that aims to strengthen the asset management industry’s foundation and ultimately benefit long-term individual investors. With previous SEC experience, Susan’s guest offers particular insights on previous rulemaking sessions vs. the current activities of Chair Gensler since his appointment in April 2021.

Here are highlights of the discussion.

Why such a challenging agenda?
The “intensity and velocity” of Chair Gensler’s regulatory agenda is more broad and complex than previous sessions’ measured and deliberate pace. The overall consensus is that Gensler’s enthusiastic agenda is aimed at improving a financial system under ongoing pressure, not least of all by technology. Add the fact that investment funds act as both issuers and investors, the wide array of topics is immense, and the implications multi-faceted. Matters of interpretation and subjectivity can make things more confusing.

What are some of the rules in play currently, and possibly coming down the pike?
Liquidity rules, SEC fund naming rules, ESG disclosure, the climate rule are in process. Others that are on the way address how investment advisors outsource and use third parties for various functions, securities lending, beneficial ownership reporting (when an entity owns a certain percentage of an issuer), cybersecurity risk management, short sale disclosure, and sanctions related to the Russia-Ukraine conflict, among many others.

Benefits of the aggressive agenda?
Revisiting certain rules potentially presents a more thoughtful and beneficial approach for investors, and provides much needed clarity, such as the names rule. Modernization is important, and technology is pushing this forward as well.

The names rule, for example.
By way of example, the names rule is designed to provide clarity for investors who consider funds based on how they are named. The SEC is proposing, for example, that certain funds named by a particular characteristic must invest a designated percentage of the value of their assets in those named investments. While the spirit of the proposal aims to ensure that fund names are not misleading to investors, there are obvious interpretive issues at play. Funds that fell under the previous rule, such as those named for municipal, China, or high yield investments are relatively straightforward, but the SEC’s proposal to also bring funds named for characteristics like value, growth, international or global may lead to interpretive challenges.

Consequences of such an aggressive agenda?
Given increasing complexity of the securities markets, and by extension the SEC rules generally, implementation of these rules for investment managers needs to be responsibly and expertly implemented. Much of the burden will fall on firms’ legal and compliance divisions. Timing for investment firms of all sizes to begin to comply with these rules, is further burdensome, given they're being released in bunches and not staggered.

Chair Gensler has yet to release the SEC’s spring rulemaking agenda, which we expect will be as weighty as 2022. As developments unfold in this critical area, stay tuned for Susan Olson’s follow up discussions in 2023.