Investment Management Regulatory Outlook 2017
Trends in asset management compliance
Get ahead of coming investment management regulatory compliance trends to better guide your strategies, actions, and investments in 2017—and beyond.
- Mutual fund reporting
- Department of Labor's definition of fiduciary
- Data analytics
- Liquidity risk management
A brief overview of the 2017 regulatory trends in investment management
This publication is part of the Deloitte Center for Regulatory Strategy Americas' annual, cross-industry series on the year's top regulatory trends. The issues below provide a starting point for an important dialogue about future regulatory challenges and opportunities.
Download the full report for a deeper look at these trends.
Mutual fund reporting
Over the past few years, the Securities and Exchange Commission (SEC) has been executing an aggressive rulemaking agenda designed to address the explosive growth and broadening complexity of the investment management industry—and the higher risks that go with it. This increasing growth and complexity are driving the development and introduction of new products, fund types, and investment strategies.
This combination of growth, complexity, and innovative technology in the asset management industry has set the stage for the SEC to adopt new reporting requirements that modernize the current reporting regime. The new requirements are intended to:
- Increase the transparency of fund portfolios and investment practices to both the SEC and investors
- Take advantage of technological advances in terms of the manner in which information is reported to the SEC and how it’s provided to investors and other potential users
- Where appropriate, reduce duplicative or otherwise unnecessary reporting burdens on the industry
Department of Labor’s (DOL) definition of fiduciary
Regulators are focusing significant attention on retirement accounts, particularly on the topic of “rollover advice” where wealth managers recommend that clients roll their 401(k) or pension plan savings into a brokerage or fee-based investment retirement account (IRA). A newly finalized rule adopted by the DOL significantly expanded the definition of what constitutes “fiduciary advice” under the Employee Retirement Income Security Act (ERISA). It also extended ERISA protections to IRAs. In response, many investment management firms are shifting from a transaction-based business model to a fee-based model.
For investment advisers, the option to roll a 401(k) into an IRA is largely a matter of customer service. But regulators see a model in which transaction volume goes down, quarterly fees replace transaction-based income, and the appearance of “reverse churning” calls advisers’ motives into question. This issue is particularly sensitive for non-discretionary accounts that leave transactional decision-making authority in the client’s hands because they appear to deliver less “service” for client fees.
The downstream impacts of this change may include revenue streams, rollover and cross-selling programs, restructuring advice, and consumer education. Also, living up to the new standard might require firms to make significant investments in technology, training, and new operational workflows. Ultimately, every touchpoint in the customer experience could be affected.
Keep up to date with our latest thinking on the DOL Fiduciary Rule.
Increased regulatory scrutiny and an emphasis on surveillance tools present the compliance function with challenges in a broad range of areas, including people, processes, and technology. To keep up with regulators, asset managers should consider investing in data analytics capabilities throughout 2017 and beyond.
An investment in data analytics capabilities can give asset managers better visibility into their organizations and enable more informed decision making. Whether the capabilities are used to identify the root causes of high redemption trends or as a means to surveil trading restrictions and employee behavior, these types of investments improve an asset manager’s ability to be proactive—rather than reactive—when pursuing business, compliance, and regulatory initiatives. Although these capabilities can be expensive, they have the potential to provide a distinct competitive advantage over firms that lack the will or resources to implement them.
Read our latest thinking on data analytics—Regulatory analytics: Keeping pace with the SEC (February 3, 2017).
Liquidity risk management
SEC rule changes will require open-end mutual funds to establish a formal liquidity risk management program, designate a liquidity risk management program administrator, categorize their assets based on how many days it would take to convert them into cash without impacting the next asset value, and require additional regulatory reporting and shareholder disclosures. In addition, a separate rule amendment will permit open-end mutual funds to use swing pricing as a way to protect shareholders from the impact of large purchases and redemptions.
In a broad sense, the regulatory focus seems to be on investment strategies that are in and of themselves sources of risk. The new rules reflect the SEC’s concern that shareholders might not be able to redeem their shares when they choose to do so. However, the new rules also present challenges to firms, particularly with respect to classifying portfolio holdings and establishing liquidity minimums.
Adviser business continuity and transition plans
The SEC proposed new rule 206(4)-4 under the Investment Advisers Act of 1940. If adopted, this rule would have a significant impact on the investment management industry, including investment advisers and service providers to the industry.
Advisers and funds should review the rule and guidance to assess potential impacts on their business. Next, they should take appropriate actions to assess strategies for addressing the requirements, which could include the following measures:
- Assigning ownership and overall governance for the program(s), involving senior management and boards
- Assessing relevant risks, including impact and likelihood of disruption, and determining severity threshold
- Benchmarking existing continuity plan(s) against the requirements
- Creating and documenting a transition plan
- Compiling an inventory of third-party service providers and their critical service providers (fourth parties); assessing relevant risks and design due diligence and ongoing oversight practices
- Developing a testing strategy and schedule to validate program effectiveness
- Enabling a change control process to create a dynamic program that can adapt to ongoing changes (e.g., new products counterparties, vendors, and acquisitions)
As fund complexes, investment advisers, and service providers increase their reliance on digital technology to conduct business, the need to safeguard sensitive financial and personal information continues to escalate.
Cybersecurity—the protection of computers, programs, and data from unauthorized access—isn’t only a growing focus for regulators. It’s also a source of potentially damaging headlines for financial institutions. Investment management firms hold valuable information that’s a prime target for hackers, and being unprepared for a cyberattack could have a devastating impact on a firm’s reputation.
The hacker community is large, intelligent, nimble, and usually a step ahead of risk-prevention measures. To combat the threat, the SEC Division of Investment Management’s published guidance on cybersecurity specifies a number of steps, including:
- Periodic assessments of information, how it’s stored, and how vulnerable it is—as well as assessments of the governance in place to counter the risks
- Strategies to prevent, detect, and respond to cyber threats, including access controls, data encryption, restrictions on removable storage media, robust backup procedures, incident response plans, and routine testing
- The use of written policies and regular communication to help a firm’s senior leadership and employees understand and carry out the steps that make a cybersecurity program effective
In today’s rapidly evolving marketplace environment, key business issues are converging with impacts felt across multiple industry sectors. What are the key trends, challenges, and opportunities that may affect your business and influence your strategy? Look for more perspectives and insights from some of Deloitte’s forward thinkers.