Trump Administration Issues Guidance On Asset Management And Insurance Regulation

On Oct. 26, 2017, the U.S. Treasury Department (Treasury) released the latest installment in a series of reports on financial regulation required by the president's Feb. 3 executive order on the financial system. That order lists seven "core principles" underlying all Federal regulatory efforts in the financial sector — generally, (i) empowering American customers, (ii) preventing bailouts, (iii) fostering economic growth, (iv) enabling American competitiveness, (v) advancing American interests in international negotiations, (vi) making regulation efficient and (vii) restoring accountability.

The Oct. 26 report addresses asset management and insurance. Others in the series address banking (released June 12, 2017); capital markets (Oct. 6, 2017); and nonbank financial institutions, financial methodology and financial innovation (pending). A related executive order issued in April requires additional reports on the Orderly Liquidation Authority established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 111 P.L. 203 (Dodd-Frank), which is pending, and the process set forth in Dodd-Frank for identifying so-called systemically important financial institutions, or SIFIs, for regulation by the Federal Reserve Board of Governors (the Fed), which was released on Nov. 17, 2017.

Some of the notable observations and recommendations of the Oct. 26 report are as follows.

In Asset Management:

Prudential regulation of asset management is unlikely to be effective for mitigating systemic risk, if any, arising from this sector. This is mainly due to the relatively low level of leverage and liquidity management employed by the sector as opposed to banking. While the Administration agrees in principle with the historical practice of limiting a mutual fund's (e.g., a registered investment company, or RIC) illiquid holdings to 15 percent of net assets, implementation of the "highly prescriptive" securities bucketing regime for liquidity risk management adopted by the Securities and Exchange Commission (the SEC) in 2016 should be postponed. "Swing pricing" for redemptions by a RIC (in which non-redeeming investors are protected from some of the dilutive effects of redemptions) should be studied further. The SEC's permission of swing pricing on a voluntary basis, set to go into effect in November 2018, is noted by the report. The SEC is called on to develop new rules (or reactivate an earlier proposal that stalled after 2008) to allow exchange-traded funds (ETFs) easier access to the capital markets by streamlining the...