(Article from Registered Funds Regulatory Update, October 2022)
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On July 26, 2022, William Birdthistle, Director of the SEC’s Division of Investment Management, addressed areas of particular interest to the Division, specific developments confronting the investment management industry and a topic of recurring interest, money market funds.
Areas of Interest for the Division
Birdthistle began his remarks by addressing three areas where the Division could improve its oversight of funds and advisers. The first area he noted was a focus on fees, specifically complex fee arrangements, such as those that include revenue sharing and soft dollars. He added that the Division’s focus on fees may take many forms, including the form and content of disclosure and ensuring that advisers comply with their fiduciary duties. The second area of opportunity is through the proposed rules on private fund advisers, which Birdthistle noted would shine a light on a “darkened corner of our markets.” The proposed rules would require private fund advisers to provide investors with quarterly statements, require private fund advisers to obtain annual audits, address the possibility for conflicts resulting from adviser-led secondary transactions, and prohibit certain practices by private fund advisers that are contrary to public interest. The third area of opportunity is the democratization of proxy voting, which Birdthistle noted is delegated to large asset managers and does not fairly reflect the views and priorities of American investors.
LIBOR and MiFID II
Birdthistle then turned to discussing two specific changes in the investment management industry: the cessation of LIBOR and the impact of MiFID II on the market for investment research.
With regards to LIBOR, Birdthistle noted that substantial progress had been made in preparing for the transition away from LIBOR on June 30, 2023. As part of the preparations for the transition, he reminded asset managers that they should understand their exposure to LIBOR-linked issuers, such as identifying data sources for security-specific updates from designated parties on fallback rates and conventions, and appropriately plan for how and when portfolio positions will convert from their use of LIBOR to an alternative reference rate. Additionally, Birdthistle stated that asset managers should be cognizant of how the value and liquidity of LIBOR-linked investments may change and ensure that all material risks are disclosed to investors.
Birdthistle then addressed MiFID II and its impact on the U.S.-EU investment research market. He noted that in response to the passing of MiFID II in Europe, which, among other things, prevents asset managers in Europe from purchasing broker-dealer research with “soft dollars,” the SEC staff issued three no-action letters, including a no-action letter taking the position that the Staff would not consider a broker-dealer that accepted compensation through certain arrangements required by MiFID II to be an investment adviser during a temporary period specified in that letter. He added that the Division does not intend to extend this temporary position beyond its current expiration date in July 2023 and does not expect to issue further assurances with respect to the adviser status of broker-dealers accepting compensation under MiFID II arrangements. Further, he stated that to the extent that the no-action letters include statements or positions that are independent of the temporary adviser status position, such as those regarding client commission arrangements, they are not being rescinded.
Money Market Fund Reform
Birdthistle ended his remarks with a discussion of money market fund reform, including provisions of the proposed rule announced in December 2021. He discussed the market stresses in March 2020, which led to record flows for money market funds. He then discussed the merits of swing pricing, a key component of the rule proposal, noting that it would be a creative solution in a future liquidity crisis.
William Birdthistle, SEC Director of Division of Investment Management, Speech, Remarks at PLI: Investment Management 2022 (July 26, 2022), available at: https://www.sec.gov/news/speech/birdthistle-remarks-pli-investment-management-2022-072622.