September 26, 2018

House Financial Services Capital Markets Subcommittee “Oversight of the SEC’s Division of Investment Management”

Key Topics & Takeaways

  • Proxy Advisors: Republicans and Democrats both asked Blass about the SEC’s recent decision to rescind its 2004 no-action letters regarding proxy advisory firms (the ISS and Egan-Jones letters).  Huizenga asked how this decision will help investors and reduce proxy advisory conflicts of interest. Blass defended the action, noting that the underlying rules surrounding proxy voting have not changed, that the Division is assessing all of its outstanding guidance as part of a regulatory review, and that the Commission wants to encourage debate at an upcoming industry roundtable on proxy advisors.
  • Exchange Traded Funds: Blass fielded numerous questions on ETFs. Rep. French Hill (R-Ark.) asked when the SEC’s rules on ETF research would be finalized. Blass said that the comment period closed in July, and that the Commission was working to finish the rule.
  • Regulation Best Interest: Republicans and Democrats pressed Blass on the SEC’s in-development Regulation Best Interest (Reg BI) for broker-dealers. While Republicans supported the SEC’s efforts, Rep. Steven Lynch (D-Mass.) pressed Blass on the statutory authority that the SEC is using to promulgate the rule, noting that the law requires the promulgated standard for broker-dealers to be “no less stringent” than the investment advisor fiduciary standard. 

Witnesses

  • Dalia Blass, Director, Division of Investment Management, U.S. Securities and Exchange Commission 

Opening Statements

Chairman Bill Huizenga (R-Wisc.)

In his opening statement, Huizenga called for policymakers to make improvements to capital markets to provide investors, especially main street investors, more opportunities to earn returns. Huizenga outlined Division of Investment Management’s (the Division) work regulating the asset management industry and praised the Securities and Exchange Commission (SEC) for beginning rulemaking on a best interest standard for broker dealers. 

Ranking Member Carolyn Maloney (D-N.Y.)

In her opening statement, Maloney outlined several recent actions by the Division that caused her concern. First, the Division rescinded two no-action letters relating to proxy advisory firms from 2004, and she argued that asset managers need proxy advisory firms to accurately vote their shares. Second, she criticized the SEC’s recent vote to eliminate the public disclosure component of the liquidity risk management rules. 

Testimony

Dalia Blass, Director, Division of Investment Management, U.S. Securities and Exchange Commission

In her testimony, Blass outlined the Division’s work in 2018, which was focused on improving the retail investor experience. Recent initiatives include rulemakings on standards of conduct for investment professionals, as well as the Division’s attempts to solicit retail investor feedback on the proposed changes. Another initiative focused on mutual fund disclosures. Blass also briefly discussed the SEC’s work to develop new regulatory frameworks for business development companies (BDCs) and exchange-traded funds (ETFs), as well as the Division’s attempts to incorporate sophisticated data analysis as part of its market regulation.

Question & Answer

Proxy No-Action Letters

Republicans and Democrats both asked Blass about the SEC’s recent decision to rescind its 2004 no-action letters regarding proxy advisory firms (the ISS and Egan-Jones letters).  Huizenga asked how this decision will help investors and reduce proxy advisory conflicts of interest. Blass defended the action, noting that the underlying rules surrounding proxy voting have not changed, that the Division is assessing all of its outstanding guidance as part of a regulatory review, and that the Commission wants to encourage debate at an upcoming industry roundtable on proxy advisors.

Maloney criticized the SEC’s decision to rescind the letters and asked Blass to specifically enumerate what industry developments since 2004 necessitated that. Blass said that the regulatory landscape has changed, passive investment has grown, and data analytical tools have changed portfolio management strategies. Blass defended the SEC’s action but said that the Commission is focused on empowering shareholders, and that proxy firms are an important part of the ecosystem.

Exchange-Traded Funds (ETFs)

Huizenga asked Blass to discuss the benefits that exchange-traded funds (ETFs) provide investors. Blass noted that ETFs have grown dramatically in recent years because investors are able to enter and exit ETF positions quickly, and that they allow for easy diversification with low fees. Blass said that it is important that investors know the difference between ETFs and other exchange-traded products (ETPs) which are not subject to all the provisions of the 1940 Investment Company Act (’40 Act).

Rep. French Hill (R-Ark.) asked when the SEC’s rules on ETF research would be finalized. Blass said that the comment period closed in July, and that the Commission was working to finish the rule.

Blass also fielded several questions about crypto ETFs and ETPs, and Blass said that crypto ETPs raise

’40 Act questions due to the law’s portfolio composition requirements. Davidson said that stakeholders want to offer crypto ETPs but are concerned by the current regulation by enforcement/rejection practices at the SEC.

Regulation Best Interest

Hultgren said he was pleased that the SEC is “stepping in” to replace the Department of Labor’s fiduciary duty rule with Regulation Best Interest (Reg BI). Hultgren asked how the SEC plans to incorporate the feedback it received regarding the rule, and Blass assured him that SEC staff are reviewing the thousands of comments received. Rep. Steven Lynch (D-Mass.) pressed Blass on the statutory authority that the SEC is using to promulgate the rule, noting that the law requires the promulgated standard for broker-dealers to be “no less stringent” than the investment advisor fiduciary standard.

Money Market Funds Rule (Floating NAV)

Maloney noted that money market funds (MMFs) are currently required to provide investors with a floating net asset value (NAV) to discourage runs on MMFs in periods of market stress. Maloney asked if the SEC had observed any problems with the rules surrounding floating NAVs. Blass noted that the SEC did see significant asset shifts during the rule’s implementation, as over $1 trillion in funds moved from prime funds to government funds.

Volcker Covered Funds

Rep. Randy Hultgren (R-Ill.) asked about the Volcker Rule’s covered fund provisions that currently prevent banks from participating in certain venture capital funds and investments. Hultgren argued that the legislative record shows that these types of investments were never meant to be included in the Volcker Rule’s prohibition on fund participation by banks. Blass said that she recognized the covered funds rule was both over-and under-inclusive and that the SEC and other regulators are still soliciting comments on their proposed revisions to Volcker. In response to a separate question, Blass said that there were statutory questions that could impact the type of reforms the SEC and other regulators could undertake, due to the Volcker Rule’s statutory prohibition on the participation by banks in private equity funds.

Rule 30e-3

Rep. Brad Sherman (D-Calif.) praised the SEC for implementing Rule 30e-3, on the electronic delivery of fund information, and asked what other actions the SEC would take to reduce the “amount of clutter” related to disclosures. Blass pointed him to the SEC’s efforts to improve the investor experience by reforming the disclosures provided to investors.

SEC Concept Release on Investing in Private Companies

Rep. Tom Emmer (R-Minn.) asked if Blass’s Division was participating in creating the SEC’s planned Concept Release on Investing in Private Companies. Blass said that the Division was working with other teams at the SEC on the Concept Release.

For more information on this hearing, please click here.