Last January, in looking ahead to the then unknown Trump administration, I made three primary points: 1) President Donald Trump's appointments to the SEC, CFTC and Treasury and Labor Departments will be extremely important in terms of shaping laws, regulations and policies for the asset management industry; 2) sweeping changes to the Dodd-Frank law will pass the House but will hit a brick wall in the Senate; and 3) the new administration brings opportunities to the asset management industry to recommend policy changes, including revising or eliminating unnecessary, duplicative or unduly burdensome requirements that are already on the books.
So where do we stand a year later?
Mr. Trump's appointments to the Securities and Exchange Commission, Commodity Futures Trading Commission, and Treasury and Labor departments are laudable. None of his financial services appointees have been put into place to tear down or denigrate their agencies.
SEC Chairman Jay Clayton has taken a deliberate and intelligent approach to running the commission, including explicitly stating that its historic approach to regulation is sound. His recent Reg Flex Agenda includes items recommended by Treasury Department reports and is a vast improvement in terms of reliability and accuracy of regulations that actually will be considered this year. With a full complement of SEC commissioners in place for the first time since 2015, Mr. Clayton will be able to benefit from diverse viewpoints — as intended when the SEC was established in 1934 — and will make it easier to meet the agency's quorum rules for transacting business.
CFTC Chairman J. Christopher Giancarlo voluntarily initiated Project KISS ("Keep It Simple, Stupid") to examine all existing CFTC regulations with an eye toward making them more effective and efficient.
Treasury Secretary Steven Mnuchin has produced several reports pursuant to Mr. Trump's executive directives, including one on asset management issues and one on reforming the Financial Stability Oversight Council. The Treasury Department's sensible and relatively modest recommendations already have had a positive impact on the asset management regulatory agenda going forward. Labor Secretary Alexander Acosta's most visible issue, the fiduciary rule, has been delayed for 18 months while the department is writing a report that re-examines the rule, as required by the president's executive directive. All in all, high marks must be given to Mr. Trump's appointments that matter most to the asset management industry. Yes, his appointees have benefited from a robust market, healthy economy and comparative lack of game-changing scandals. And yes, there will always be vigorous debates about asset management rules and policies. But it is difficult to characterize the foreseeable asset management agenda as radical, revolutionary or counterproductive.
Little change on the Hill
The situation on Capitol Hill is unchanged from last year. As predicted, the House passed the Financial CHOICE Act last June on a strict party-line vote. The CHOICE Act — which Democrats have labeled the Wrong Choice Act — is a sweeping bill that would repeal various provisions of the Dodd-Frank Act and other rules, including the fiduciary rule, private equity registration, the Volcker rule and the FSOC's ability to designate non-bank systematically important financial institutions. But Senate rules will preclude consideration of anything similar on the other side of Capitol Hill. Under Senate rules, 60 votes are required to allow a vote on legislation. While Mr. Trump has expressed his desire for the Senate to change its rules to require only a simple majority (different rules allowed the Senate to vote on Supreme Court Neil Gorsuch's nomination to the Supreme Court and the recently enacted tax bill), Senate Majority Leader Mitch McConnell categorically stated last April that "There's not a single senator in the majority who thinks we ought to change the legislative filibuster — not one." While incremental legislation, like S.B. 2155, which would reduce burdens on regional banks, could move forward before Congress adjourns later this year, the possibility of expansive financial services legislation is basically zero — absent some major shocking development.
So what can we expect during 2018? At the SEC, Mr. Clayton's short-term agenda for the asset management industry includes: 1) rule-making regarding standards of conduct for investment professionals; 2) reproposing rules for "plain vanilla" exchange-traded funds; 3) proposed rules to harmonize SEC and CFTC derivatives rules; and 4) amendments to the Volcker rule. While it does not appear on the agency's agenda for 2018, I don't think you can rule out the possibility the SEC could consider amendments to the liquidity rule. Both the Treasury Department and the Investment Company Institute have recommended altering the buckets required by the liquidity rule. And it is certainly possible some action might be taken with respect to initial coin offerings and cryptocurrencies.
There are more rule-makings of interest to the asset management industry on the SEC's long-term agenda. These include: 1) use of derivatives by registered investment companies and business development companies; 2) advertising of target-date funds; 3) stress-testing for large asset managers and mutual funds; 4) amending the current marketing/advertising rules under the Investment Advisers Act; 5) incentive-based compensation rules for financial institutions that have $1 billion or more in assets; 6) rules related to exchange-traded products; 7) potential revisions to the accredited investor definition; and 8) various rule-makings associated with security-based swaps.
There are two significant potential rule-makings that have fallen off both lists: the proposed business continuity and transition planning rule (which has been withdrawn) and a potential rule-making requiring investment advisers to have third-party compliance reviews.
In the meantime, there is good reason to believe that meaningful reforms will by pursued by the FSOC, led by Treasury Secretary Mnuchin, that should provide greater transparency and due process to potential non-bank SIFI designations.
Looking to 2018, there is good reason to believe issues that matter to asset management firms will be considered thoughtfully, and with fair advance notice and opportunities to participate in deliberations shaping any rules. One wild card might be Europe's Markets in Financial Instruments Directive II and other international laws and regulations that might create difficult choices for U.S. firms without robust input. As usual, asset management firms would be well-advised to participate as fully as possible in the debates that might lead to further changes in laws and regulations.
David Tittsworth is a counsel in the Washington office of Ropes & Gray LLP, and a previous president and CEO of the Investment Adviser Association. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.