Regulatory Outlook Reveals Impact to Asset Managers

By Allison Lovett posted 20 days ago

  

Nicsa members received a generous dose of regulatory oversight during a panel event moderated by Frank Maresca, Vice President of Broadridge.


“The SEC has been very busy this year, both proposing and enacting rules that impact reporting,” Maresca said. “It is interesting to examine how these rules converge in making information for investors more digestible and impactful, as well as furthering the use of technology to drive engagement and investor insight.”

 

The panel, which featured experts from Putnam Investments and Ropes & Gray LLP, was designed to help financial services firms worldwide navigate trends dominating the regulatory landscape. Areas of focus included the proposed modernization of fund reports and disclosures, reforms related to closed-end funds and BDC offerings, the status of Rule 30e-3, and disclosure improvements for variable insurance contracts.

 

Modernizing Fund Reports and Disclosures

“The SEC unanimously proposed amendments to Form N-1A and certain disclosure and advertising rules that apply to mutual funds and ETFs,” said Chelsea Childs, Associate at Ropes & Gray.

 

“Those proposals are intended to modernize the disclosure requirements by requiring only key information to be delivered to shareholders. Funds would then refer shareholders to the fund website for other information that the SEC has deemed less important, such as financial statements.”

 

Under the proposal, a new summary Annual Report (AR) and summary Semi-Annual Report (SAR) would replace the existing AR and SAR.

 

“This is a very significant change; therefore, it's going to be operationally challenging, requiring a lot of input and parties involved,” said Venice Monagan, Counsel at Putnam Investments. “But we know that the actual implementation is several years out, which makes it more feasible.”

 

The SEC has outlined structured requirements related to the order in which information is presented and also recommends the use of graphical elements.

 

“The biggest takeaway here is we are going from a report that could be over 100 pages to something that the FTC is envisioning to be three or four pages,” Monagan said. “This is a very radical change compared with what we now conceive of as a shareholder report.”

 

Closed-end Fund and BDC Offering Reform

Childs said the SEC also adopted amended rules and forms intended to streamline the registration, communication, and offering processes for closed-end funds and BDCs.

 

“There’s a lot to unpack in these reforms,” she said. “One main theme is that eligible funds are now allowed to rely on certain practices that previously were only available to operating companies.”

 

According to Childs, the reforms impact different types of funds in different ways.

 

“There are differences, of course, between BDCs and closed-end funds,” she said. “There are also differences between types of closed-end funds — whether the reforms relate to how they impact an interval fund or just a traditional listed closed-end fund.”

 

“Importantly, size matters here,” she continued. “Some provisions of these reforms apply to all registered closed-end funds and BDCs, but importantly, some provisions also apply only to seasoned funds.”

 

Childs defined a seasoned fund as current in its reporting requirements with at least $75 million in public float, or the aggregate market value of the equity of the fund that is held by people who are not affiliated with the fund.

 

“This public float concept also comes into play for the top tier, the largest category that we've got here, which are well-known seasoned issuers, or WKSIs. Because the reforms allow for different paths to registration for different fund sizes, it’s important to classify what universe of funds you have and which of these reforms the funds can avail themselves of.”

 

Disclosure improvements for Variable Insurance Products

Back in March, the SEC adopted Rule 498-A, which permits the use of a summary prospectus to satisfy Securities Act delivery requirements relating to variable insurance products.

 

"The Commission is taking this important step to improve Main Street investors' understanding of these products,” SEC Chairman Jay Clayton stated at the time. "With today's technology and the benefits of layered disclosure, investors should not have to work through hundreds of pages of disclosure to understand these products' risks, fees, and features in order to make informed investment decisions. 

 

Childs said that the proposed new Rule 498-B would allow funds to satisfy their prospective delivery requirements under the Securities Act by providing material updates to shareholders throughout the year.

 

“That’s going to be done primarily through the shareholder reports and through supplements to the prospectus,” she said. “Initial purchases of shares, however, are still going to be required; funds will still have to deliver the full prospectus to an investor who is making an initial purchase, but existing shareholders and additional purchases can receive these more streamlined documents.”

 

“In order to rely on this proposed rule, similar to the summary prospectus rule, the fund needs to make its summary prospectus, SAI, and reports all accessible online, free of charge, on the fund's website.”

 

Rule 30e-3

Numerous asset managers that have gotten up to speed with proposed rule 30e-3, which permits funds to use a notice-and-access approach that they can use to deliver annual and semi-annual reports in lieu of mailing a paper report.

 

Monagan said Putnam is gearing up for the January 1, 2021, implementation date, upon which funds can mail a notice of the availability of shareholder reports on the internet.

 

“Our notice, which would go to direct shareholders, will inform them of the availability of the shareholder reports and give them the availability to opt-in, request hard copies, et cetera,” she said. “We plan on moving forward with this effort until it is clear whether this new rule proposal will become effective.”

 

 #Compliance/Legal

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