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SEC Open Meeting

Securities and Exchange Commission

Open Meeting

Wednesday, February 9, 2022

Topline

  • The Commission approved all three proposals, voting 3-1 for the Investment Advisers Act amendments and cyber security risk management proposals and unanimously agreeing to propose rules shortening the settlement cycle to T+1.
  • As part of the settlement cycle proposal, the Commission also put out a request for comment on shortening the settlement cycle to T+0.
  • The public comment periods for all three proposals will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

ITEM 1: Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews

The Commission voted 3-1 to propose rules and amendments under the Investment Advisers Act of 1940 (Advisors Act) for private fund advisers and to propose amendments to the compliance rule under the Advisers Act.

Commission Director of Investment Management William Birdthistle explained the Division of Investment Management’s recommendation to propose rules to enhance the regulation of private fund advisers and amend the compliance rule to enhance investor protection. He noted the current lack of transparency for private fund investors and that today’s recommendations do not require disclosure of holdings or strategies publicly but instead would increase transparency on fees and performance for investors. He also explained that certain activities should be restricted due to presenting a conflict of interest around fees and expenses. Commission Senior Counsel of Private Funds Branch Christine Schleppegrell described the recommendations in more detail including the five new rules proposed under the Advisors Act, and Commission Chief Economist Jessica Wachter discussed the economic impact of the recommendations and the importance of private fund advisers to raising capital. She also described lack of fee transparency and conflict of interest.

Commissioner Discussion

Commissioner Hester Peirce criticized the Commission as diverting retail investment protection resources to a class of investors able to fend for themselves. She also characterized the documentation proposal as a recasting of the SEC’s mission. She concluded that the proposals provide retail-like protections to accredited investors.

Commissioner Allison Herren Lee stated that the proposals address information gaps and asymmetries and conflicts of interest and discussed how more retail investors are being exposed to private markets. She also said the quarterly statement requirement will give retail and institutional investors good information in a useful format. She then explained the rules’ benefit of protecting against certain conflicts of interest, for instance, by disclosing forms of preferential treatment to other investors. She concluded that the proposals promote accountability, including through the financial statement audit requirement, and safeguard the accuracy of an adviser’s representations.

Commissioner Caroline Crenshaw said the rules align advisers’ disclosures and conduct with their clients’ interests but that better disclosure alone does not adequately protect investors. She concluded that the proposals promote the interests of private fund investors.

Commission Chair Gary Gensler said the purposes of the rules are to improve efficiency, competition, and transparency and that they would help investors in private funds and the companies raising capital from these funds. He explained the growth and utility of these funds, noting their approximately $18 trillion in gross assets. He added that the funds pool money of limited partners, usually retirement plans, nonprofits, and university endowments, backed by teachers, firefighters, and professors and touch so many parts of the economy. Gensler summarized the potential impact of the rules, including to increase transparency, prohibit advisors from engaging in activities contrary to the public interest, only allow preferential treatment if there is proper disclosure, require annual audit of the advisers’ evaluation of private fund assets often used to calculate fees, get an opinion from an opinion provider, and change obligations around books and compliance. After the vote, Gensler said the comment period will be whichever is longer between two timelines: 30 days from posting on the Federal Register or 60 days from posting on the Commission’s website. He added that the comment files will be open as soon as the Commission puts the rules on its public website in the next 24 hours.

ITEM 2: Adviser and Fund Cybersecurity Risk Management

The Commission voted 3-1 to propose new rules to address cybersecurity risk management for investment advisers and investment companies as well as related amendments to certain rules regarding adviser and fund disclosures under the Advisers Act and the Investment Company Act.

Birdthistle described the current lack of rules requiring firms to have cybersecurity programs or to report cybersecurity incidents. Other staff described the proposal’s several key components, and Wachter explained interconnection and lack of trust as risks from cyber breaches. She described the benefits of the proposals for funds, investors, and capital formation. She also said the rules will have direct costs likely passed on to investors.

Commissioner Discussion

Pierce stated that she was in favor of some form of breach reporting but that the Commission should resist the temptation to use enforcement actions after a breach where a firm has taken reasonable steps to protect against breaches. She added that making advice illegal during a breach is extreme and that a cyber rule styled as a cudgel will not facilitate cooperation. Lee called the requirements to write cybersecurity policies and procedures and provide notification to the Commission of certain cybersecurity incidents important investor protections. Crenshaw stated that the rules would require advisers in funds to tell investors about their cybersecurity posture but that this is just one piece of the puzzle.

Gensler said that cybersecurity related to each part of the Commission’s three-part mission. He added that the ruled would strengthen the financial sector’s cybersecurity reporting requirements and could give clients and investors better information when investing and ensure better cyber hygiene for firms. Gensler also said that he has asked staff for recommendations about broker dealers, systems compliance integrity, Regulation SP, and third-party service providers.

ITEM 3: Shortening the Securities Transaction Settlement Cycle

The Commission unanimously agreed to propose rules and rule amendments, applicable to broker-dealers and certain clearing agencies, under the Securities Exchange Act of 1934 (Exchange Act) to shorten the standard settlement cycle for most securities transactions. The Commission also unanimously agreed to propose rule amendments under the Advisers Act to require investment advisers to maintain certain related records.

Commission Director of the Division of Trading and Markets Haoxiang Zhu stated that shortening the settlement cycle would reduce risk and reduce the aggregate value of unsettled transactions, decreasing systemic risk. He also discussed shortening the settlement cycle to T+0 and the possible benefits, and Commission Assistant Director Matthew Lee gave a brief overview of each of the recommendations. Wachter discussed the economic impact of the shortening the cycle, mentioning that, in the interval between trade execution and settlement, there is counterparty risk. She stated that the first part of the proposal reduces transaction risk and increases trust in the financial system, possibly bringing greater investment facilitating capital formation.

Commissioner Discussion

Pierce expressed support for the amendment and said it would reduce settlement risk and clearing costs in times of volatility. She added that same day settlement benefits may not outweigh the costs but that the conversation is helpful. Lee described the benefits of a shorter settlement cycle and said she is looking forward to the conversation on same-day settlement. Crenshaw said that the longer the settlement cycle, the greater the risk and that the rule would reduce this risk and improve operational efficiency. She added that the rule enjoys widespread support among market participants and concluded that same-day settlement may be both desirable and feasible and that some such efforts are already underway.

Gensler explained that the rule would lower risk and drive efficiencies in the market and that today’s release would do three things: shorten the settlement cycle, require affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date, and require clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing — i.e., fully automated transactions processing.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.