In the annual ritual of previewing the year ahead, fund directors say they have become accustomed to a familiar list of perennial issues requiring their attention as part of their duty to look out for the best interests of mutual fund shareholders. That is, until 2017 came into view.
“Donald Trump winning the election in November has really turned everything on its head,” according to Amy Lancellotta, managing director at the Independent Directors Council, referring to the dark horse Republican presidential nominee who surprised pundits and pollsters who predicted the post would go to former Secretary of State Hillary Clinton. “The agenda to me is a clean slate,” Lancellotta said.
Susan Ferris Wyderko, chief executive of the Mutual Fund Directors Forum, agreed, calling the political landscape and its potential to catalyze change for the asset management industry the new year’s big “wild card.”
Among the many uncertainties for markets and the financial services industry looms the question of whether the incoming government administration will attempt to halt work on regulations in progress, or pull the plug on new regulation altogether. “It’s conceivable it could happen,” Wyderko said.
As Trump builds his presidential cabinet and names heads of government agencies, a shift in the importance of the Securities and Exchange Commission and its leadership has become clear. In the wake of the financial crisis and fund industry turmoil from the early 2000s, the regulator plays a more important role than it did previously, elevating the task of filling the agency’s soon-to-be empty seats. In the past, it could take months after a change in administration to see a new SEC chief take office.
“Given the profile of the SEC over the past 10 years, the importance of the work it does, and the role of markets factoring in much more to daily lives than they ever used to, I’d anticipate a decision would be made sooner rather than later,” Wyderko said. “The composition of the commission will dictate in large part the agency’s agenda.” For example, White is a former Debevoise & Plimpton prosecutor, and her commission’s prosecutorial function reflected that expertise, Wyderko explained. Other chairs have come from different parts of the industry and have had different sets of priorities, she added.
Within the regulatory agenda, fund boards will be paying close attention to how the new SEC envisions boards’ seat at the table. “The theme is the role of fund boards in SEC regulation, and whether the new commission will respect that role,” according to Lancellotta.
White addressed the commission’s expectations of boards at an industry conference in March, encouraging gatekeepers to ask proactive questions to anticipate, rather than react to, the next crisis. The IDC has been outspoken in noting a shift in the fund board role over the course of White’s tenure at the SEC. “It’s one thing to talk about it, but when you put pen to paper [in rulemaking] it’s very difficult,” Lancellotta said.
The debate over the appropriate level of board oversight was especially acute in context of White’s liquidity and derivatives proposals. The as-yet-unfinalized derivatives rule, for example, places a handful of traditionally managerial responsibilities on boards, such as approving calculation of its fund’s Value at Risk (VaR).
A year ago, Lancellotta says she would have thought completing the derivatives rule would have been a top priority heading into 2017. Regulators say they’re not giving up on the current regulatory agenda (see related story), while others say the long-awaited rule governing fund use of derivatives is dead in the water.
One year ago
Last year, Fund Directions readers reported that cyber security, distributions in guise, fund litigation, valuation and liquidity ranked among their highest concerns for the coming year. Anecdotally, each of those issues still resonates, but the tone and tenor of conversations around them has shifted. Noticeably absent from director agendas for the coming year is money market reform, which insiders say has been fully accounted for at this point from the board perspective.
Meanwhile, boards’ focus on liquidity hasn’t gone anywhere in the last 12 months, but it, too, has shifted course. A year ago, all eyes were on Third Avenue when its Focused Credit Fund collapsed, prompting emergency action from the commission to temporarily halt redemptions. The resulting high-yield fund sweep in early 2016 found Third Avenue’s problems were not indicative of a wider liquidity crisis, but fund companies and regulators continue to tend to the wounds left by the ordeal.
“We’re still dealing with issues regarding potential liquidity crises,” Wyderko said. The December 2015 scare coalesced market attention around the liquidity issue, which the SEC had by then already attempted to address with its proposal to codify how mutual funds should manage liquidity risk management internally. The proposal has since been finalized, and in 2017 boards will be working toward its 2018 implementation deadline.
“Between Third Avenue and the liquidity proposal, I think that funds have already taken a hard look at their liquidity risk management processes,” according to Lancellotta. Boards will be working hard to adapt, but “I don’t think it will be as much a focus in 2017,” she said.
Outside of the SEC’s purview, jitters surrounding the US Department of Labor’s fiduciary rule and its spring implementation date have intensified. Even without any unexpected political developments threatening to intervene, industry professionals say they’re in the dark as to how some if its requirements will play out. Lancellotta says she expects a development on the rule right out of the gate, and is hoping for an extension on its April 2017 implementation.
“It’s still unclear how the major platforms are going to implement or operationalize requirements of the rule, and not clear they’ll do it in the same way,” Wyderko said. “The fund industry is similarly in doubt over how the rule will apply in practice.” As such, experts say the DoL rule has the biggest potential to alter the course of the industry. Fund boards are already fielding requests for slimmed-down share class lineups, poising the industry for a major shift in how mutual funds are distributed.
It’s unclear how the Trump administration will treat the rule and whether there is any room to call back some of its mandates. Some experts say fund companies that have already made strategic changes in response aren’t likely to backpedal even if it were to be challenged in the coming year (see related story).
As the industry continues to game-plan its response to the DoL rule’s requirements, renewed attention to the future of the fund industry has materialized. “There are some seismic changes going on in investor preferences as a whole,” Wyderko said. “The DoL rule is likely only accelerating these changes,” she said. For example, the rise of passive investing, active managers’ struggle to maintain AUM, and the generational shift are leaving an irrevocable mark on the fund industry and its overseers.
Again, macro issues play a role, with as-yet undefined foreign policy under Trump and the United Kingdom’s populist movement challenging cross-boarder business operations and investing. “Even funds without a strong investment interest abroad will be impacted,” Lancellotta said.