Leading the Way on Policy Issues

ICI’s COVID-19 response: In March, the World Health Organization (WHO) declared COVID-19—a disease caused by a novel coronavirus—a pandemic, as cases surged around the globe. The spread of the pandemic has caused many sectors, including the fund industry, to change many aspects of how they conduct their business.

In early March 2020, ICI began conducting surveys to understand members’ response to COVID-19. To date, ICI has conducted three surveys. The first, which was conducted when the virus was largely off US shores, focused on the travel restrictions members were imposing on their employees. The second survey was conducted later in March as members contemplated how to transition to a remote work environment. The third, most in-depth survey was conducted in late June and focused on issues members are considering in the transition of employees back to an office environment.

In addition, ICI continues to hold frequent member calls with many ICI member committees, review and disseminate regulatory actions, and maintain a comprehensive COVID-19 resource center on the ICI website. In summer 2020, an ICI working group conducted a wide-ranging study of the pandemic’s effect on the financial markets and how regulated funds and their investors reacted, and coordinated with policymakers and offered critical member services as the pandemic took hold.

Advertising requirements for advisers and private funds: In December 2019, the SEC proposed changes to the advertising and cash solicitation rules that apply to investment advisers and private funds. While the proposed changes to those rules were not intended to apply directly to registered fund advertising, the proposal, if adopted, would conditionally permit advisers and private funds to report hypothetical and related performance and to use testimonials and social media.

ICI submitted a comment letter in February 2020 recommending that the SEC more closely align requirements for registered fund advertising with any final requirements for advisers and private funds to enhance investor understanding and facilitate comparisons among products. ICI also urged the SEC to explicitly exclude registered fund communications that are already regulated under the Investment Company Act from the scope of any final advertising or cash solicitation rules under the Investment Advisers Act to eliminate unnecessary overlap in compliance burdens.

Commodity pool operators: SEC-registered advisers to some registered funds are also required to register as commodity pool operators (CPOs) with the CFTC. These dual registrants face overlapping requirements in areas such as regulatory reporting. In April 2020, the CFTC issued a proposal to streamline the periodic reporting requirements for CPOs.

ICI has long urged the CFTC to reduce unnecessary regulatory burdens for CPOs to registered funds. In October 2019 and February 2020, ICI President and CEO Paul Schott Stevens met one-on-one with CFTC Chairman Heath Tarbert to engage directly on this issue. In addition, in June, ICI reinforced the message with a letter endorsing the CFTC’s reporting proposal and urging its swift adoption.

Expedited process for exemptive relief: In October 2019, the SEC proposed an expedited 45-day review for exemptive relief applications that are substantially identical to relief that it had recently granted, a 90-day nonbinding time frame for staff to take action on other applications, and a requirement to publish on EDGAR staff comments on applications and responses regarding an application after its final disposition.

ICI filed a comment letter strongly supporting this proposal as a whole but requesting additional flexibility for applicants and recommending that the SEC eliminate its proposal to publish staff comments and applicant responses. The SEC adopted the final rule in July 2020, largely reflecting ICI’s comments by adding more flexibility for applicants to use the expedited procedures and deferring a decision on whether to publish staff comments and applicant responses, pending further consideration.

Financial Stability Oversight Council (FSOC) approach to exercising authorities: In March 2019, the FSOC proposed prioritizing an “activities-based approach” to evaluating and addressing potential risks to financial stability. It further proposed enhancing the process by which it would consider designating nonbank financial companies as systemically important financial institutions (SIFIs)—reserving this designation power for rare instances.

ICI’s May 2019 comment letter strongly supported the proposal and suggested ways to improve it. The FSOC finalized its revised interpretive guidance in December 2019, following years of advocacy by ICI and its members. As ICI has long urged, an activities-based approach provides a more effective way to address underlying sources of risk, enhances the role of primary regulators with frontline expertise, and capitalizes on the FSOC’s valuable convening and coordinating powers. In those unusual circumstances when it considers SIFI designation, it will do so under a process that is more analytically rigorous, transparent, and accountable.

Funds’ use of derivatives: In November 2019, the SEC issued its long-awaited reproposal to reform the regulation of US-registered funds’ use of derivatives, aiming to consolidate 40 years of guidance, no-action letters, and informal comments into a single, comprehensive rule. The reproposal would permit funds to use derivatives in more than a minimal amount, if they implement a derivatives risk management program and if their derivatives use does not exceed specific risk-based leverage limits.

ICI submitted a comment letter in April 2020 commending the SEC for crafting a proposal that would both protect investors and preserve fund managers’ ability to use these practical portfolio management tools. The letter recommended several targeted adjustments to enhance the proposal, such as increasing the leverage limits and amending the proposal to lessen the impact on funds and their shareholders. The Institute continues to engage closely with the SEC and staff to incorporate the recommendations pending a final rule.

Proxy Voting

• Fund proxy reform: The SEC’s recent proxy work—begun in 2018—initially contemplated addressing only proxy advice, the shareholder proposal rule, and “proxy plumbing” reform (i.e., actions to modernize the overall proxy system to promote greater efficiency and accuracy). In July 2020, however, the SEC added fund proxy reform to its rulemaking agenda.

ICI submitted two documents to the SEC in 2019 that made the case for SEC reform of the fund proxy system. The June 2019 letter described the unique challenges that funds as issuers face in seeking shareholder approvals and offered several recommendations for improving the system. The December 2019 report, which included seven years of survey data on fund proxy campaigns, examined proxy cost information together with shareholder voting data and demonstrated that the current proxy system is failing to facilitate a cost-effective fund governance process. In July 2020, the SEC added fund proxy reform to its rulemaking agenda.

• Proxy advice: In November 2019, the SEC proposed proxy voting advice amendments. The proposal would have granted companies conducting proxy campaigns the right to review and comment on proxy advisory firms’ draft advice before funds and other clients received it.

ICI’s February 2020 comment letter opposed this aspect of the proposal, maintaining that such a review framework would adversely affect the timeliness and cost of proxy advisory firms’ advice, and thus its overall value to funds. ICI recommended an alternative whereby funds would receive proxy reports concurrent with their release to companies for review and comment. The final amendments, adopted in July 2020, incorporated a review and comment framework similar to ICI’s recommendation.

Access to private markets: In 2019, the SEC issued a concept release seeking input on expanding private market access while maintaining investor protection. Building on ideas from that concept release, in 2020, it proposed to expand the definition of accredited investor, the threshold that investors generally must meet to invest in the private market.

ICI filed comment letters in response to the concept release and accredited investor proposal, urging the SEC to carefully consider investor protection measures in expanding private market access. The letters highlighted that regulated funds provide investors with both access to the private markets and strong investor protections and recommended that the SEC modify regulations and certain staff positions to encourage private market exposure through these vehicles. SEC staff recently indicated that they are exploring ways to provide enhanced access to private investments through regulated fund structures, such as target date and closed-end funds.

Activist campaigns: In 2010, the SEC staff issued a no-action letter that limited the ability of closed-end funds to defend themselves against activist investors seeking short-term profits.

In March 2020, ICI submitted a comprehensive report to the SEC, countering the letter’s legal conclusions and providing detailed data and context on the history of the closed-end fund market, recent activist campaigns, and the harm those campaigns have caused to closed-end funds and their long-term shareholders. The Institute met with policymakers to explain the report’s findings and to highlight the benefits of closed-end funds—including their ability to offer retail investors more exposure to private offerings. The SEC staff withdrew the letter in May 2020 and is analyzing how closed-end funds can help give retail investors greater access to private markets.

Common ownership: The “common ownership” hypothesis is the notion that institutional investors holding small, noncontrolling stakes in competing companies in concentrated industries, such as airlines or banks, decrease competition and raise consumer prices.

ICI remains engaged with policymakers, regulators, and other interested parties to rebut unproven claims of anticompetitive effects under this hypothesis. In response to questions from the Federal Trade Commission (FTC), in November 2019, ICI submitted a comment letter further explaining how investment advisers—which act as fiduciaries to thousands of funds and other clients with different investment goals—lack both the incentive and mechanism to affect price competition. The letter details why investment advisers and the managers of commonly held firms likely could not discern a competitive strategy that maximizes returns among diverse investors. ICI also continues to stay abreast of recent developments abroad on common ownership. For example, the European Parliament recently published a study about common ownership in the EU banking sector that declined to conclude that common ownership harms competition.

Data privacy in Canada: The Canadian government is considering sweeping updates to its privacy and data protection laws, including amendments to the Personal Information Protection and Electronic Documents Act (PIPEDA), in which it will address treatment of transborder dataflows.

In March 2020, ICI Global submitted a letter offering recommendations based on “lessons learned” from members’ experience with data privacy laws in the United States and European Union. ICI expects to provide more detailed feedback when the government releases proposed text of any legislative amendments to PIPEDA.

Due diligence questionnaire: Funds face unique challenges in performing intermediary oversight, especially in light of MiFID II requirements, changing regulatory landscapes, and the absence of an agreed-upon industry standard between funds and their distribution channels.

To help address these challenges, ICI Global brought together an industry working group, joining with distributors and fund managers to issue a common protocol for distribution oversight. The resulting due diligence questionnaire serves as the standard for UCITS and alternative investment funds (AIFs) in performing onboarding and ongoing oversight of distribution channels.

ESG: 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 will not impose unnecessary burdens on managers, hinder investment choice, or stifle the growth and innovation of the ESG market.

Global derivatives/leverage: In March 2020, ESMA proposed guidelines that regulators in EU member states would use: a) to assess how alternative investment funds’ use of leverage contributes to systemic risk in the financial system; and b) to design, calibrate, and implement macroprudential leverage limits for those funds. The assessment phase would include a two-step framework that would identify funds that may cause risks to financial stability, then determine for which funds leverage limits are appropriate. The guidelines would set high-level principles on the timing and level of such limits.

ICI Global filed a comment letter generally supporting the two-step assessment framework, providing specific recommendations for the framework to serve as a screening tool to meaningfully narrow the group of funds that would be subject to further analysis. The letter discussed how national regulators should consider imposing appropriate leverage limits to address the specific risks they identify in their jurisdictions.

Global financial stability: The role of regulated funds in financial stability continues to draw policymakers’ attention, especially in Europe. Open-end funds investing in less-liquid assets, as well as money market funds, remain areas of focus. Some policymakers contend that market stress or other events could trigger heavy redemption activity, necessitate “fire sales” of portfolio assets, or both. More broadly, bank-oriented policymakers have called for extending “macroprudential policy” beyond the banking sector.

Auditor independence: In December 2019, the SEC proposed amendments to its auditor independence rule to ensure that relationships and services that do not pose threats to the auditor’s objectivity and impartiality do not trigger non-substantive violations or potentially time-consuming audit committee reviews of immaterial matters. For example, the amendments would exclude certain investment advisers and the funds they manage from the investment company complex entities from which a fund’s auditor must be independent.

ICI and IDC filed a joint comment letter in March 2020 supporting the proposed amendments. The letter argued that the non-substantive violations the amendments seek to address amount to “false positives” and that the amendments would enable audit committees to more effectively focus on accounting and auditing matters of importance to the integrity and reliability of the fund’s financial statements.

Cybersecurity: Beginning in mid-March 2020, tens of thousands of mutual fund employees, not only in the United States but around the world, were sent home to work remotely due to COVID-19. While constant planning and testing of business continuity plans by firms enabled members to transition without interruption to fund operations, the threat landscape expanded dramatically.

ICI’s Chief Information Security Officer Committee, which typically meets three times per year, began meeting every two months. This community of peers discussed new challenges and risks faced by the remote workforce, and member participation in the meetings increased significantly. Concurrently, the committee and ICI updated and disseminated, in the United States and globally, its annual Cybersecurity Survey, which includes a new section on COVID-19.

Fraud prevention: Fraudulent schemes—identity theft, romance scams, COVID-19 cures, and a host of other swindles—continue to pose threats to fund shareholders. ICI members have reported that fraud and fraud attempts have increased significantly and that the methods for perpetrating fraud have evolved and become more sophisticated.

ICI continued its critical role supporting members’ fraud prevention efforts on several fronts, including work from its Fraud Prevention Working Group, launched in 2018. ICI Operations developed a mechanism to provide members with a year-over-year comparison of key fraud statistics and trends gathered on a quarterly basis from working group participants. In March 2020, ICI Operations published a comprehensive white paper, Red Flag Indicators: Warnings of Potentially Fraudulent Activity, to help funds and transfer agents identify red flags that may be indicative of fraud, identify possible enhancements to their fraud prevention and Reg S-ID: Identity Theft Red Flag programs, and augment their internal fraud prevention training resources. Finally, ICI continues to serve as a conduit for members to share real-time fraud alerts with working group participants.

CARES Act: In March 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to provide emergency assistance and healthcare response for individuals, families, and businesses affected by the COVID-19 pandemic. The CARES Act included several welcome changes to rules affecting retirement plans and IRAs.

ICI advocated for the suspension of required minimum distribution rules for defined contribution plans and IRAs for 2020, ultimately included in the CARES Act, along with special rules permitting penalty-free retirement plan distributions and expanded plan loan availability. ICI immediately began outreach to the IRS and Treasury Department to alert them to guidance needed to implement the CARES Act provisions.

Electronic delivery: In 2020, the DOL finalized a regulation it had proposed in October 2019, creating a new safe harbor, using a “notice and access” structure. The new safe harbor allows retirement plans to use electronic delivery as the default for notices sent to participants and beneficiaries, while still allowing participants and beneficiaries to opt for paper delivery.

ICI submitted a comment letter in November 2019 in response to the proposed regulation, voicing strong support for the proposal and encouraging the DOL to finalize it without delay. The letter described the many advantages of using electronic delivery and offered specific suggestions, several of which the DOL incorporated in the final regulation.

Environmental, social, and governance (ESG) investing: In June 2020, the DOL proposed a regulation on selecting ESG investments for retirement plans. The proposal broadly treats any fund that includes environmental, social, corporate governance, and/or “any similarly oriented assessments or judgments in their investment mandates” as “ESG investments” subject to heightened scrutiny and increased administrative burden. In addition, the proposal would add new requirements applicable to all plan investments, including a troubling requirement to compare each plan investment to all “available alternative investments or investment courses of action.”

In July, ICI submitted a letter urging the DOL to withdraw the proposal, explaining that mutual funds’ portfolio managers—even those of funds that do not include ESG-related terms in their names or market themselves as ESG funds—routinely include ESG considerations in their decisionmaking to enhance performance, manage investment risks, and identify emerging investment risks and opportunities. Singling out one investment category for special treatment is inconsistent with long-standing DOL precedent and will have far-reaching effects on the selection of all plan investment options.

COVID-19 tax challenges: The novel coronavirus pandemic raised tax issues for regulated investment companies (RICs) as the federal government, fund complexes, and service providers closed their offices to prevent the spread of the virus. The closures made it nearly impossible for funds to file timely tax returns and obtain from the IRS certificates of residence (CoRs) needed to recover certain foreign taxes. Stress in the credit markets also created distribution issues for business development companies (BDCs) and some closed-end funds, as interest payments on debt securities held by the funds were postponed.

ICI sought and received from the IRS filing extensions until July 15, 2020, for RIC tax returns. ICI also sought relief permitting the use of digital signatures and received some relief extending the validity of funds’ CoRs. After discussions with ICI, the IRS provided relief to BDCs and closed-end funds by permitting such funds temporarily to pay up to 90 percent of their dividends in stock.

Financial transaction taxes (FTTs): The United States and Europe have both advanced proposals to tax financial transactions. FTTs would harm fund investors, especially those saving for retirement and other long-term needs.

ICI and members provided policymakers in the United States and in Europe with detailed explanations, both in writing and in person, of the negative impact of FTTs on fund investors. ICI continues to strongly oppose FTTs despite minor changes responding to a few concerns.

India surcharge tax: The 2019 Indian budget proposed a significant tax increase on capital gains of all FPIs organized in noncorporate form (e.g., as trusts). The 2020 Indian budget included a new mechanism to impose the tax surcharge on dividends paid to noncorporate FPIs.

ICI Global sent comment letters to and met with Finance Ministry officials and other senior government officials in New Delhi to oppose the application of the surcharge tax to capital gains of noncorporate FPIs. The government later withdrew this proposal. ICI Global also has sent comment letters to government officials opposing the application of the tax to dividends.

Maryland services tax proposal: A 5 percent sales tax on services (including professional services such as legal, accounting, and investment management) was proposed in the Maryland legislature. This tax would have placed Maryland-based firms at a competitive disadvantage.

ICI submitted written testimony opposing this bill, recommending that the tax not apply to any services consumed by funds and their advisers. ICI further urged that a comprehensive study must be conducted before any services tax proposal advances to prevent fund investors and their advisers from suffering unintended consequences. The bill was subsequently defeated.

OECD initiative to expand taxing rights: The Organisation for Economic Co-operation and Development (OECD) is crafting global solutions to tax challenges arising from the “digitalizing economy.” These initiatives are not limited to “digital” companies, but instead will affect all firms that operate globally by fundamentally changing the existing international tax regime.