2019 FinReg Outlook: The Calm Before the Storm

The SEC Will Start Checking Items off its To-Do List Despite the talk of a deregulatory push in the US, the SEC has a busy year ahead. Regulation Best Interest is probably the biggest item on the SEC’s agenda. Designed to replace the Department of Labor’s controversial Fiduciary Rule, the package of reforms include creating a best interest standard for brokers, increasing conflict of interest disclosures, and restricting the use of the term advisor. The rules could have fundamental implications for asset managers’ product and distribution strategies, such as changing who pays for distribution or the creation of clean share classes, and its progress will be closely scrutinized by the industry. The SEC is also expected to finalize the ETF rules it proposed last summer. The rules seek to harmonize the US ETF market by allowing certain open-ended ETFs to be launched without exemptive relief, allowing all ETFs to use custom creation/redemption baskets, and increase transparency through enhanced disclosures. An outgrowth of the ETF proposals is the resurrection of the derivatives rule. Originally proposed in 2015, but abandoned in the face of fierce industry criticism, the rule sought to regulate the amount of imbedded leverage in mutual funds. The main criticism of the original proposal was that it was overly prescriptive and could restrict product offerings. The industry is anxiously waiting to see if the revived derivative rule will incorporate any of its original feedback. Finally, the SEC is looking at a number of options to enhance the retail investor experience and improve fund disclosures. The focus will be on pivoting away from paper-based communication and increasing the use of digital tools, apps, and text messaging. There is also the possibility of creating a one-page sheet at the beginning of a fund prospectus for key information like fees and historical performance, which is similar to the UCITS Key Information Document in Europe. 2019 FinReg Outlook: The Calm Before the Storm    7