Asset Manager, Market Structure Rules Face 2017 Limbo

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By Rob Tricchinelli

Dec. 5 — A set of pending SEC regulations affecting the asset management industry and equity market structure might fall by the wayside once Chairman Mary Jo White departs.

Most of the regulations envisioned by White aren’t required by a law like the Dodd-Frank Act, meaning a new chairman could drastically revamp them or easily leave them off the agency’s agenda.

The deregulatory, free-market attitude of former SEC Commissioner Paul Atkins, who is advising President-elect Donald Trump on financial regulations and appointments, suggests the new agency chairman isn’t likely to continue at full speed with White’s agenda in those areas.

White’s proposals, especially on asset managers, also face pushback from financial trade groups, whose influence may grow under a Trump-appointed SEC chairman.

Asset Managers

The SEC has adopted new data disclosure and liquidity risk management requirements for funds, but proposals designed to limit funds’ use of derivatives and require them to create transition plans haven’t been adopted.

The derivatives rule in particular is overly regimented and applies a single framework to many different kinds of funds, trade groups have said.

“We have some real concerns with the derivatives rule,” David Blass, general counsel at the Investment Company Institute, told Bloomberg BNA in an interview.

ICI knocked the proposal for relying on the notional value of derivatives and not evaluating different types of the instruments based on the risk they pose to a fund portfolio.

“It is better to provide standards, because the asset management industry ranges from very, very large entities to very, very small companies,” Felicia Smith, a vice president and senior counsel for regulatory affairs at the Financial Services Roundtable, told Bloomberg BNA in an interview. “What works for larger shops that operate in multiple markets throughout the world is not going to be the same for a company that operates in one part of the U.S.”

“We do favor having a more principles-based approach as opposed to creating something that is more prescriptive,” she added.

Stress Testing

A congressionally mandated stress test rule hasn’t been proposed. Attorneys and other industry watchers have said it is the most difficult to formulate among the set of asset manager rules.

Section 165(i) of Dodd-Frank requires regulators to define “stress test” and “establish methodologies” for them. The law, though, gives little direction on how to implement them.

That part of the law also sets out bank stress tests. In Congress’s approach to that section, “it’s very clear they were writing that for banks and broker-dealers that have capital requirements,” Blass said. “Funds are almost entirely capitalized, and capital requirements don’t make sense in that context.”

Some groups argue that a standalone stress test rule is redundant, given language in the SEC’s liquidity risk management rule that warns firms of “the need to consider normal and reasonably foreseeable stressed market conditions.”

“Many of the elements of the liquidity risk management rule call for versions of stress testing,” Blass said.

Given the rule’s complexity and Republican lawmakers’ desire to rework bank stress tests, the rule might never even get proposed.

Market Structure

White’s efforts to overhaul U.S. equity market structure have seen mixed progress and will be in limbo for the near future as well.

A requirement for off-exchange algorithmic traders to register and another to enhance dark-pool disclosures also have been proposed, as has a requirement for brokers to reveal more about how they handle large equity orders.

An anti-disruptive trading rule and a registration regime for proprietary traders are still in the works.

Some of these rules would affect Regulation National Market System, adopted in 2005 to regulate market structure. Atkins voted against Reg NMS while serving as an SEC commissioner and has been a fierce critic since. Critics cite the rule’s complexity and market fragmentation that resulted since its adoption, as well as the rise of high-speed traders.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at PDiamond@bna.com

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