Mutual funds: Regulatory evolution, industry adaptation

by AM admin on March 14, 2016

By Anthony Conte, US Asset and Wealth Management Regulatory Leader, PwC LLP, and Scott Weisman, Managing Director, PwC LLP – 

In 2015, the Securities and Exchange Commission set an ambitious agenda to address certain risks in the
mutual fund industry. While global regulators did not designate any fund managers or complexes as so-called Systemically Important Financial Institutions (SIFIs)—which would have subjected firms to rigorous bank-like regulations—the SEC’s strong assertions left no doubt as to which agency is the primary regulator of funds and advisers.

Indeed, the agency issued three major rule proposals intended to increase transparency and protect against perceived sources of instability. These reforms addressed the use of derivatives and leverage by funds; enhanced requirements for data reporting by investment companies and advisers; and increased disclosure of liquidity risk management efforts by open-ended funds, as well as the allowance of “swing pricing” to mitigate shareholder dilution—permitting funds to adjust their net asset value (NAV) to reflect trading activity, such as major purchases or redemptions.

And there may be more to come. During a speech in December 2014, SEC Chair Mary Jo White said the Commission is working on additional proposals related to transition planning and third-party examinations for advisers, annual stress testing for large funds and advisers, and a uniform fiduciary duty standard for brokers and advisers.

So what does this all mean for mutual funds?

Adapting to their new SEC-mandated surroundings will likely mean that mutual funds must nurture a host of new skills—such as efficiently collecting and using data; complying with tighter liquidity and derivatives guidelines; performing stress testing; and implementing sophisticated risk management tools.

The challenge, of course, is to begin taking transformational steps while the new set of conditions is beginning to emerge. By the time the mechanisms of change are clearly in sight and the pace picks up momentum, mutual funds risk playing catch-up—and may miss their chance to evolve and adapt ahead of their competitors.

Indeed, the pace is not slowing. While the SEC has now proposed and/or adopted most of the rules that were mandated under Dodd-Frank, it is becoming clear that its regulatory, examination, and enforcement posture will continue for the foreseeable future.

Our view? Now that we’re a few months into 2016, it’s becoming increasingly clear that this year may be shaped by additional change, adaptation, and evolution on both an industry and individual fund level.

This post originally appeared on Anthony’s LinkedIn blog.  Be sure to follow him for up-to-date insights and to start a conversation on this topic and more!

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