ICI’s regulatory work this year will be remembered for its robust response to the COVID-19 crisis. The spread of the disease into a global pandemic—and the challenging market conditions that ensued—spurred policymakers across the world to take remarkable action. And the Institute’s close engagement with them helped produce practical solutions that advanced the interests of member firms and protected their investors.
Yet even as ICI responded swiftly to the crisis, it continued to deliver on its usual extensive agenda of regulatory priorities. Throughout the year, the Institute worked tirelessly on behalf of members and their investors in pursuit of a wide range of important policy goals.
Critical Response to a Crisis
As the pandemic’s early days ushered in extraordinary market volatility and intense demands for liquidity, ICI acted quickly to confront the developing challenges facing the industry.
Together with members, ICI urged senior US Treasury and Federal Reserve officials to adjust some of the Fed’s emergency liquidity facilities to make them more useful and effective. And at the Institute’s request, Securities and Exchange Commission (SEC) staff provided relief to ensure that the industry could continue to manage liquidity in these difficult market conditions—first for money market funds and then for long-term mutual funds.
On the global front, ICI led a joint effort urging regulators to keep financial markets open, helped secure an extension of deadlines for regulatory consultations, and shared timely data and analysis with policymakers and other trade bodies on the behavior of fund investors during the crisis.
Major Progress in FSOC’s Policy Approach
ICI has long advocated for the Financial Stability Oversight Council (FSOC) to improve its approach to identifying and mitigating any potential systemic risk among nonbank financial companies. With the FSOC adopting constructive reforms to its interpretive guidance governing designation of nonbank financial companies as systemically important financial institutions (SIFIs), this year marked major progress toward that goal.
In line with ICI’s recommendations, the FSOC will examine financial products, activities, and practices that could pose risks to US financial stability. If the FSOC identifies a potential risk to US financial stability, it will work with financial regulators to seek implementation of appropriate actions to address that risk.
The FSOC will consider designating a company as a SIFI only if it believes the company poses risks that cannot be addressed through this activities-based approach. In cases where the FSOC does decide to pursue SIFI designation of a company, it will do so through a more transparent, analytically rigorous process—involving more timely and constructive engagement with the company and its primary regulator.
At the ESG Forefront
Interest in environmental, social, and governance (ESG) investing grew substantially over the past year. And as fund managers worked to meet this increasing investor demand, ICI experts delivered thorough, well-informed support to members in this complex, rapidly evolving space.
The Institute’s most important initiative here focused on improving the public’s understanding of ESG investing and the many choices that regulated funds provide. The publication stemming from the initiative—written by a working group of senior executives from ICI members—set forth a simple, consistent terminology for firms to use when describing ESG integration and sustainable investing strategies. ICI’s Board of Governors strongly endorsed the working group’s recommendations and urged all members to implement the terminology as soon as reasonably practicable.
Funds May Incorporate Sustainable Investing Strategies in Multiple Ways
ICI's ESG Working Group's ESG roadmap describes in detail how funds commonly pursue sustainable investing strategies using multiple nonexclusive approaches.
The year also saw the Institute advocate vigorously for sound, investor-centered ESG policymaking around the world, and build a comprehensive tracker of global ESG policy developments.
Derivatives and Fair Valuation: Pursuing Sound Regulatory Frameworks
In November 2019, the SEC issued its long-awaited reproposal of a rule to reform the regulation of US-registered funds’ use of derivatives—aiming to consolidate 40 years of guidance, no-action letters, and informal comments from the Commission and staff into a single, comprehensive rule.
ICI’s supportive comments commended the SEC for crafting a proposal that would both protect investors and preserve fund managers’ ability to use these practical portfolio management tools. The Institute also recommended several targeted adjustments to enhance the proposal, and worked closely with the SEC and staff to incorporate them into the final rule, which the Commission adopted in October 2020.
Issued in April 2020, the SEC’s proposal to modernize the regulation of funds’ valuation of portfolio securities similarly seeks to replace a patchwork of guidance—and also earned ICI’s support.
In comments to the Commission, ICI praised the proposal for acknowledging the importance of accounting standards in the valuation process, and for recognizing the complementary and essential roles that investment advisers and fund boards play in it. Ahead of the final rule’s adoption in December 2020, the Institute engaged with the SEC and staff to modify some of the proposal’s requirements in a way that would more accurately reflect funds’ current practices—while still maintaining investor protections.
Toward a More Efficient Fund Proxy System
ICI’s efforts to improve the proxy system for funds as issuers continued apace this year, with a report to the SEC highlighting a wide-ranging survey of fund companies about their recent proxy campaigns.
The report emphasizes the many challenges—and high expenses—that fund complexes often face in soliciting proxy votes, while illustrating how these hurdles can disproportionately affect decisions relating to fund policies, governance, and operations.
Among its many recommendations for improving the fund proxy system, ICI called on the SEC to create a new, more practical way for funds to reach a majority vote on specified items, which could save fund shareholders millions of dollars.
Stepping Up for Closed-End Funds
Closed-end funds (CEFs) are a smaller segment of the regulated fund industry, but offer distinct investment opportunities. Thanks to ICI’s resolute advocacy on behalf of CEFs and their investors this year, the SEC staff withdrew Boulder Total Return Fund, Inc., a 2010 no-action letter that had limited CEFs’ ability to defend themselves against activist investors seeking short-term profits.
ICI’s advocacy centered on a comprehensive report, delivered to the SEC in May 2020, that refuted the Boulder letter’s conclusions and showed how it harmed CEFs and their investors. The Institute also met with policymakers to explain the report’s findings and highlight the benefits of CEFs, including their ability to offer retail investors exposure to private equity and other investment opportunities.
The SEC is now analyzing how CEFs can help give retail investors greater access to private markets, and ICI looks forward to further discussions on this issue with the Commission and staff.
Seeking Improvements to MiFID II/MiFIR
The revised Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) have spurred innovation and enhanced competition across parts of the trading and market structure landscape, but the MiFID II/MiFIR framework is far from perfect. With helpful input from members, ICI delivered a highly detailed response to a European Commission consultation outlining numerous ways to improve the framework.
ICI’s response recommended changes to enhance pre-trade and post-trade transparency and ensure that fund managers can maximize execution quality for their investors. To strengthen the framework’s investor protections, the response offered recommendations for improving the fund investment process, enhancing investor choice, and enabling investors to benefit from cost efficiencies derived from the management of pooled fund assets.
The Institute is confident that these recommendations will help inform the European Commission’s thinking as it considers proposing changes to the MiFID II/MiFIR framework.
For more than 40 years, US-registered funds using derivatives have had to negotiate an increasingly complex maze of guidance, no-action letters, and informal comments from the Securities and Exchange Commission (SEC) and staff. In November 2019, the Commission took a major, long-needed step with a promising new proposal aimed at consolidating this cumbersome regulatory framework into a single comprehensive rule.
ICI’s supportive comments commended the SEC for crafting a proposal that would protect investors while preserving fund managers’ ability to use these practical portfolio management tools—and recommended several targeted adjustments to enhance it. The Institute’s main recommendations included:
- revising the proposal’s limits on leverage, so that fewer funds have to deregister or change their investment strategy;
- excluding certain financial instruments that do not pose risks commonly associated with derivatives from the definitions of “derivatives transaction” and “senior security,” so that funds investing solely or primarily in these instruments do not unduly fall subject to the rule; and
- modifying the criteria that funds must use when selecting a securities index to compare against for the proposal’s relative value-at-risk leverage limit, so that the indexes they select align more closely with investors’ expectations of their funds’ volatility and risk.
ICI engaged closely with the SEC and staff to incorporate these revisions and others into the final rule ahead of its adoption in October 2020.
Closed-end funds (CEFs) offer their shareholders many benefits, including a steady stream of income and the ability to access specialized asset classes. Yet over the past decade, the number of CEFs has declined, from 629 at year-end 2009 to 494 at year-end 2019, hindering investors’ ability to take advantage of these important investment vehicles. One reason for this decrease is a marked increase in activist activity, which was facilitated by the Boulder Total Return Fund, Inc.—a no-action letter issued by the Securities and Exchange Commission (SEC) staff in 2010. The letter limited the ability of CEFs to defend themselves and their shareholders against activist investors seeking short-term profits. As a result, CEFs became more attractive for activists to target and employ arbitrage tactics against—tactics that often forced CEFs to shrink or liquidate, which increased the costs for shareholders and reduced the availability of CEFs to investors.
In March 2020, ICI submitted a comprehensive report to the SEC, using robust legal and statistical analysis to demonstrate why the Boulder letter’s conclusions were wrong and how the letter had harmed CEFs and their investors. ICI also met with policymakers to explain the reports’ findings and highlight the benefits of CEFs—including their ability to offer retail investors more opportunities to access private equity and other investments. The SEC withdrew the letter in May 2020 and is analyzing how CEFs can help achieve the Commission’s goal of giving retail investors greater access to private markets.
Though helping members navigate COVID-19 responses was a top priority for ICI Global, it continued to work with members on preparing for Brexit and advocated on crucial EU legislative proposals.
Throughout 2020, ICI Global met with UK and EU policymakers to urge them to minimize business disruptions and unnecessary costs for funds by negotiating cooperation agreements between the United Kingdom and other countries. These agreements will allow funds to continue to delegate fund management to the United Kingdom after the Brexit transition period. ICI Global also submitted a comment letter to UK government officials about the importance of maintaining and supporting cross-border distribution of funds.
EU policymakers are reviewing the revised Markets in Financial Instruments Directive/Regulation (MiFID II/MiFIR). ICI Global met with policymakers and submitted a comprehensive comment letter advocating for:
- Establishing a consolidated tape to make markets more transparent, fair, and efficient
- Improving investors’ access to appropriate regulated funds by enhancing the inducements framework
- Reforming disclosure requirements to make them more user-friendly and engaging
- Making e-delivery the default method for disclosures and communications
As part of the EU Action Plan on Sustainable Finance, policymakers adopted new environmental, social, and governance (ESG) disclosure requirements for asset managers and funds. Policymakers also continue to propose additional requirements for ESG disclosure, the consideration of ESG in the investment process, and the distribution of ESG funds. These requirements will create substantive new obligations for managers. Through numerous meetings and comment letters, ICI Global advocated for more workable standards and requirements that won’t impose unnecessary burdens on managers, hinder investment choice, or stifle the growth and innovation of the ESG market.