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What Fund Managers Can Expect From 2021 Regulations

It remains to be seen what new regulations fund managers will face under a new administration and SEC leadership, but they still face an important set of new rules to start complying with in 2021.

2021 will be an important year in terms of the regulations that fund managers face, particularly due to power passing between two very different leaders in the U.S. As President Joe Biden assumed office in January, he has appointed a new Securities and Exchange Commission chairman in Gary Gensler – a former leader of the Commodity Futures Trading Commission under the Obama administration.

In the first days of the new administration, Biden issued a freeze on new regulations across agencies, including the SEC.1 Rules that have been finalized but not yet added to the Federal Register will remain frozen until reviewed by a Biden administration appointee. The order also requests that rules that have been finalized and added to the register but are not yet in effect are frozen for 60 days to be further reviewed.

While it remains to be seen how and when newly approved SEC rules will move forward and what new requirements will emerge under a new administration, asset managers can find opportunity in the rule freeze to get up to speed on the regulatory changes that are likely to move forward at some point, as well as consider what these rules will require of their teams and resources when they’ll eventually face the requirement to comply. Below are a few rules prompting much discussion in the industry.

  • Derivatives Final Rule – Rule 18f-4 replaces a decades-old patchwork of guidance with a comprehensive framework for the use of derivatives transactions by registered funds. The rule, which is structured as an exemption from restrictions on the issuance of “senior securities” set forth in Sections 18 and 61 of the 1940 Act, imposes several conditions on funds that make significant use of derivatives transactions

For more about this rule, see the SEC’s communications on it here.

  • Fund of Fund Arrangements Final Rule – Rule 12d1-4 is intended to create a more comprehensive framework for fund of funds arrangements to replace the existing approach, which combines statutory exemptions, SEC rules, and exemptive orders and varies based on an acquiring fund’s type. While Rule 12d1-4 will permit more types of fund of funds arrangements without an exemptive order, it has a new set of conditions including limits on control and voting of acquired funds’ shares, evaluations and findings by investment advisers, fund investment agreements, and limits on most three-tier fund structures.

Advisers with existing fund of fund arrangements are encouraged to evaluate their portfolios and consider any operational or procedural changes necessary to comply.   For more information on this rule, see the SEC’s communications on it here.

  • Fair Valuation Rule – Rule 2a-5 under the 1940 Act is intended to address valuation practices and the role of the board of directors with respect to the fair value of the investments of a registered investment company. The rule would also mandate more specific fair value practices, policies and procedures, reporting, and recordkeeping requirements.

These changes would require boards to change their operations to comply with the following needs:

    • Assess and manage valuation risks
    • Establish and apply fair value methodologies
    • Test fair value methodologies for appropriateness and accuracy
    • Evaluate and oversee pricing services.  
    • Adopt and implement fair value policies and procedures

One key element of the rule is that it provides express permission for boards to assign fair valuation responsibilities to the investment adviser. For more about these rules, see the SEC’s communications here.

  • Fund Reporting Modernization Proposed Rule – The SEC has proposed rule and form amendments intended to modify the disclosure framework for funds registered on Form N-1A to follow an approach that highlights key information for retail investors. The proposals would make streamlined annual and semi-annual shareholder reports (shortened to about three to four pages) the primary source of fund disclosure for existing shareholders. Certain information currently required in the reports would be made available online and delivered free of charge upon request. This information would also be filed with the SEC on Form N-CSR. In addition, funds would no longer be required to deliver an updated prospectus to existing investors who purchase additional shares. Funds would rely on shareholder reports to keep shareholders informed along with notifications of any material changes to the funds via prospectus supplements and the availability of the fund’s prospectus online. The motivation for these updates is to enhance the mutual fund and ETF retail investor experience. For more about this rule, see the SEC’s communications about it here.

Analyzing the Impact of Regulations in 2021

Behind the SEC’s newer regulations, we continue to see a motivation to create increasing transparency and better communication for investors through the Fund of Fund Arrangements Rule, Fair Valuation Rule, and Fund Reporting Modernization Rule. Meanwhile, the Derivatives Rule shows a willingness to allow asset managers more freedom to engage with different and complex investing tools – provided managers build in the required risk protection and transparency measures.

Time will tell how these regulations evolve under a Biden administration. In the meantime, managers can prepare for the rest of 2021 by staying ahead of the curve on these key proposed and final rules – which in itself takes significant resources. Finding partnership in a knowledge company that has a bird’s eye view of the industry – including when it comes to regulatory updates, compliance timelines and sophisticated data management abilities, especially as many regulations aim to keep investors better informed of a fund’s returns and operations – will provide immense guidance and support when it comes time to comply.

The right partner should be able to offer all of these individual capabilities coupled with a holistic view of a manager’s operations. While regulatory responsibilities only seem to grow, and the costs and resources required also grow, the right partner relieves a fund manager of these non-core operations, allowing the manager to focus on high performance for the new year ahead.

1 The White House, “Regulatory Freeze Pending Review”, January 20 2021.

Barbara Nelligan

Head of Fund Governance Solutions, North America

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