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SEC Investment Management Chief Speaks on Regulation Outside the U.S.

Good morning.  Thank you, Mark, for your kind invitation to speak with you all today – and congratulations on the 25th anniversary of this conference.  I am deeply honored to be giving the Scott Friestad Memorial Keynote address, particularly since we are joined today by his son, Wilson.  Thank you, Wilson, for your gracious introduction.

Although my time at the SEC began after Scott’s passing, Scott’s diligence, excellence, and commitment to public service continue to resonate within the agency today.  Indeed, I see those traits in the colleagues by whom I’m inspired every day in the Division of Investment Management.  I am sure that many in the agency, and particularly his former colleagues in the Division of Enforcement, are proud to carry on Scott’s legacy.[1]

Before I continue, please allow me to provide the standard disclaimer that my remarks today express my own views, and do not necessarily reflect those of the Commission, the Commissioners, or other members of the Staff.[2]

As with previous deliverers of this keynote address, I am particularly pleased to be speaking here today amongst so many of our international counterparts.  Indeed, until I became a United States citizen in 2008, I had spent almost all of the first thirty-five years of my life living abroad, so I both value the importance of international understandings and appreciate the influence of American culture and law across the globe.

I have, for instance, a keen appreciation for football, in its European, American, Canadian, Australian, rugby, and even Gaelic permutations.  Though those sports all involve common themes, they clearly differ, thanks largely to different laws of the game.  Even within a single one of those sports, the game can differ from region to region because of varying interpretations of the rules and diverse points of emphasis.  They do, however, seem to improve with international dialog and innovation.  A truly great team today is likely to feature players from all around the world.  To take an example at random, Liverpool Football Club’s recent Champion’s League winning squad started players from Brazil, Cameroon, the Netherlands, Scotland, Senegal, Egypt, and even England.  We have much to teach one another in the pursuit of excellence.

I find that many of the more serious issues we face in the world today, with respect to the securities industry or otherwise, also have a global reach and consequences.  COVID, of course, has made us all acutely aware of this fact.  Supply chain issues, travel challenges, and the omnipresent reality of life in a pandemic are apparent in many facets of our everyday activities.  Now more than perhaps ever, we are all intensely aware that we must grapple with the potential cross-border impacts to important aspects of our lives here in the U.S.

Asset managers themselves are increasingly global.[3]  Of course, “global” can mean many different things to an asset manager.  An asset manager may, for example, be “global” with respect to the markets in which they invest, the places in which they maintain offices, where their clients or potential clients reside, where assets are held or traded, or where functions might be outsourced.  Indeed, asset managers have an increasingly complex and often global footprint that crosses many operational, cultural, and even regulatory perimeters.

International Events and Developments

This theme of interconnectedness is also pertinent to regulators of all stripes.  The asset management industry is globalized, as are the challenges the industry faces.  Through all of these developments, however, the SEC remains committed to its three-part mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.  And the agency uses this mission as its guide to facing the challenges of the day.[4]

Earlier this year, for instance, geopolitical events in Eastern Europe had significant effects on transactions in the Russian equity markets and relevant markets for Russian equity securities generally.[5]  As a result of these events, certain U.S. funds experienced a circumstance in which virtually all of their direct and indirect holdings of Russian equity securities became illiquid and were fair valued at or near zero.[6]  In this situation, the Commission granted relief requested by certain funds to temporarily suspend the right of redemption for the protection of the funds’ shareholders.[7]  Although Eastern Europe may feel far from our shores geographically, the events of this spring and summer illustrate that the impact of events abroad can and do affect American investors.  The staff’s vigilance remains unwavering, far-reaching, and on high alert in times of stress, to ensure that we are faithful to our mission and, in particular, our duty to protect investors.

Another area of international connectedness where the staff has paid keen attention to cross-border challenges is MiFID II, on which I have previously spoken.[8]  In this and every instance, we as a regulator rely on constructive engagement from market participants with an understanding of operational dynamics and practicalities.  We also deeply value our collaboration with international regulators who share our commitment to the public interest, regardless of our nationality or jurisdiction.  As an example, SEC staff are active participants in IOSCO and FSB projects, sharing our experiences and learning from our fellow regulators.

We have also observed that innovation in our markets can on occasion be inspired by asset managers abroad.  Single stock ETFs, for example, have been present in Europe for some time, but have made their U.S. debut only in recent months.[9]   The staff’s awareness and understanding of developments abroad is crucial to anticipating and better understanding potential future innovations that may arise closer to home.

Recent Division of Investment Management Rulemakings

The Commission recently proposed or adopted several rules that reflect our understanding of the reality of globalization in the asset management industry.  I’d like to take the opportunity to highlight a few of these rulemakings today.

First, as recently as Wednesday, November 2, the Commission voted to propose rule and form amendments related to liquidity risk management programs and swing pricing for open-end funds.[10]  The amendments are designed to improve funds’ preparedness for stressed market conditions and to mitigate the dilution of shareholders’ interests.  That proposal reflects, in part, our understanding of how some European funds already operate, specifically with respect to swing pricing.[11]  Within our own borders, no U.S. fund has yet opted to employ swing pricing to mitigate dilution due to operational issues.[12]  Swing pricing, however, proved useful in other jurisdictions during March 2020 and similar periods.[13]  In comparing the March 2020 experience here in the United States to the experience of some funds in Europe, we are able to glean potential lessons for our own regulatory regime.  The international community has also taken interest in the topic of fund liquidity and the use of swing pricing, including in a recent workshop hosted by the Financial Stability Board.[14]

Also relevant to the theme of globalization and interconnectedness is the Commission’s recent rule proposal related to outsourcing by investment advisers.[15]  The Commission voted to propose a new rule and related amendments that would establish a set of minimum and consistent due diligence and monitoring obligations for SEC-registered investment advisers that outsource certain functions or services.  As part of this proposal, the Commission noted that asset managers may engage with service providers with international operations and, therefore, generally should consider potential risks related to outsourcing beyond US borders.[16]

We look forward to a robust, productive, and thoughtful comment file on both of these proposals from any interested commentator, wherever they may be located.

Last, an excellent backstop to the risks of an ever-changing and interconnected world and asset management industry is high-quality disclosure to investors.  In an increasingly complex world, it’s increasingly important that busy investors receive disclosure that is not only accurate, but also concise and useful for making decisions.  Effective disclosure allows investors to find useful fund information quickly, thus facilitating informed investment decisions.  Recently, the Commission voted to adopt amendments requiring that funds’ annual and semi-annual shareholder reports present key information designed to be particularly useful to the retail investor clearly and concisely.[17]  I am confident that investors will reap the benefits of such disclosure as they look to invest their savings in funds with exposure to markets at home and abroad.

Conclusion

And though an increasing interconnectedness brings many benefits with it, we should not overlook the value that also comes from innovation within particular countries.  To return to football for a moment, rugby football has long been dominated by the sustained brilliance that emerges from a small island country that has nurtured a culture of innovation and excellence.  I am referring to New Zealand, though one might be forgiven for assuming I meant the top-ranked men’s rugby team in the world today, the Republic of Ireland.

To conclude, I must particularly and enthusiastically thank the staff in the Division’s Rulemaking Office.  All of the rulemakings I have mentioned today have been voted on during Open Commission Meetings within one recent fortnight alone.  Our Rulemaking colleagues’ hard work, expertise, and dedication to investors is truly an inspiration.  And, indeed, perhaps in some measure an echo of the sterling career of Scott Friestad.  Thank you.

ENDNOTES

[1]   See Statement on Passing of Enforcement Division Associate Director Scott W. Friestad (Apr. 5, 2018), available at https://www.sec.gov/news/public-statement/statement-commission-040518.

[2]   This speech is provided in the author’s official capacity as the Commission’s Director of the Division of Investment Management, but does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.

[3]    Based on staff analysis of data filed on Form ADV as of December 2021, RIAs have RAUM attributable to non-US clients of $33.9 trillion, an increase of approximately 80% (from $18.6 trillion) since December 2017.  For comparison, RAUM attributable to US clients has increased 46% over the same time period (from $65 trillion to $94.7 trillion).

[4]   “The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.” See Agency and Mission Information, available at https://www.sec.gov/about/reports/sec-fy2014-agency-mission-information.pdf.

[5]    See e.g. Voya Russia Fund, a Series of Voya Mutual Funds, and Voya Investments, LLC; Notice of Application and Temporary Order, Investment Company Act Rel. No. 34578 (May 4, 2022), available at https://www.sec.gov/rules/ic/2022/ic-34578.pdf; iShares MSCI Russia ETF, a Series of iShares Inc., and BlackRock Fund Advisors; Notice of Application and Temporary Order, Investment Company Act Rel. No. 34661 (Aug. 3, 2022), available athttps://www.sec.gov/rules/ic/2022/ic-34661.pdf.

[6]    See id.

[7]    See id.

[8]    See Remarks at PLI: Investment Management 2022 (July 26, 2022), available athttps://www.sec.gov/news/speech/birdthistle-remarks-pli-investment-management-2022-072622.

[9]    Statement on Single Stock Levered and/or Inverse ETFs (July 11, 2022), available athttps://www.sec.gov/news/statement/schock-statement-single-stock-levered-and-or-inverse-etfs-071122.

[10]    See generally Proposed Rule: Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, Investment Company Act Rel. No. 34746 (Nov. 2, 2022) available at https://www.sec.gov/rules/proposed/2022/33-11130.pdf.

[11]   See id at 18.

[12]   See id at 35 (“Today, no fund has implemented swing pricing, and funds rarely use redemption fees to address dilution other than in the case of short-term trading of fund shares, meaning shareholders may experience dilution both in normal and stressed conditions, particularly when purchases or redemptions are large or when funds invest in markets with high transaction costs relative to other markets.”).

[13]   See id at 22, n.40.

[14]   See Call for papers: Vulnerabilities from liquidity mismatch in open-ended funds and policies to address them, Financial Stability Board (June 2022), available at https://www.fsb.org/wp-content/uploads/R130422.pdf.

[15]   See generally Proposed Rule: Outsourcing by Investment Advisers, Investment Advisers Act Rel. No. 6176 (Oct. 26, 2022), available at https://www.sec.gov/rules/proposed/2022/ia-6176.pdf.

[16]   See id at 49 (“An adviser also generally should consider that a provider may pose unique or novel risks such as international operations, limited financial or operational history, lack of financial or operational transparency, lack of sufficient operating capital to support long-term operations, inability or unwillingness to provide client references, insufficient availability of qualified personnel, infrastructure susceptibility to extreme weather, lack of adequate data security, and prior service failures.”).

[17]    See generally Final Rule: Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, Investment Company Act Rel. No  34731 (Oct. 26, 2022), available at https://www.sec.gov/rules/final/2022/33-11125.pdf.

These remarks were delivered on November 14, 2022, by William A. Birdthistle, director of the Division of Investment Management at the U.S. Securities and Exchange Commission, as the Scott Friestad Memorial Keynote Address in Washington, D.C.

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