By Amanda Maine, J.D.
The SEC’s Asset Management Advisory Committee (AMAC), which will conclude its tenure with a meeting on November 3, held a meeting on October 28 to discuss a number of issues, including recommendations to the Commission about issues facing smaller investment advisory companies made by AMAC’s Small Advisers and Small Funds Subcommittee. The November 3 AMAC meeting will consider the subcommittee’s findings in full as its tenure draws to a close.
Proposed recommendations for small firms. Scot Draeger, president, general counsel, and director of Wealth Management of investment advisory firm R.M. Davis, Inc. and the Small Advisers and Small Funds Subcommittee chair, presented the subcommittee’s recommendations for smaller investment advisers to the full committee. Draeger noted several observations the committee made regarding how the SEC’s regulatory regime impacts smaller firms. These include e-delivery for notices, disclosures, approvals, and signatures that are not currently permitted on a default basis. The data security regime remains “Balkanized,” Draeger said, and there is also an expectation/resource delta when it comes to smaller firms. In addition, there continues to be a disconnect on the use of proxy advisory firms as a method of fiduciary fulfillment. License fees by CUSIP and other services also pose a problem, according to Draeger.
The recommendations presented to the full committee include modernizing the definition of “Small Entities” when it comes to Regulatory Flexibility Act considerations. Draeger noted that assets under management (AUM) is less effective in labeling a small business compared to other issues like human and financial resources. As an example, he noted that a principal advisor to a fund that would need to have fewer than 50 employees or annual revenue less than $25 million. These definitions should be modernized, according to the subcommittee.
Market structure recommendations. The subcommittee’s recommendations also cited issues related to market structure that impact small advisory firms. One recommendation is that the Commission convene a roundtable to study the inaccessibility to new issues in the bond market, which the subcommittee attributed to being “exacerbated” by market developments like the expansion of private debt markets (such as Rule 144A offerings) that are less accessible to small investors and advisory firms. The SEC should examine how to give investors a level playing field to access new issues in the bond market.
The subcommittee also recommended that the SEC make it legally acceptable for investment advisers and funds to utilize an electronic “access and notice” regime for delivery of all required information to investors. In addition, the SEC should allow the use of electronic signatures for client consents, contracts, and approvals as the default practice, with an investor opt-out right.
Cybersecurity and data privacy. Draeger acknowledged the difficulty that would come with establishing a data security, privacy, and cybersecurity regime. However, the subcommittee recommended that the SEC take an advocacy role in encouraging a data security and privacy law regime applicable to the financial sector that would ideally be centralized at the federal level. The subcommittee also wants the SEC to consider issuing “best practices” in these areas.
Proxies, liquidity, and CUSIP. The recommendation also states that the SEC’s work on the use and reliance on proxy firms should be considered “unfinished.” The Commission and the staff should “fully consider the extent to which reliance on issuer diligence and recommendations made/performed by proxy advisory firms enhances (rather than detracts from)” how smaller advisory firms and funds fulfill their fiduciary duties when it comes to proxy voting.
The SEC should look into the Derivatives Risk Management Program because of confusion on the balance of governance and oversight by the fund board, the subcommittee said. Under current SEC rules, a fund’s investment adviser is ineligible to serve as the derivative risk manager. However, funds have requested more guidance in this area, in particular the delineation of duties between the fund board, fund advisor, and the derivatives risk manager.
Finally, the subcommittee recommended that the SEC examine whether to remove “CUSIP” (Committee on Uniform Securities Identification Procedures) references to its own securities identifiers in its rules and regulations. In addition, the SEC should study whether it has jurisdiction over regulating CUSIP and securities index licensing fee practices as they pertain to investment advisers. If the SEC does have such jurisdiction, the subcommittee recommended that it take action to limit such fees. If not, the SEC should coordinate with the Federal Trade Commission on how to limit these fees, citing similar actions taken by European regulators.