FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
In every long marriage, there are good times, and there are not-so-good times.
It’s safe to say the U.S. Securities and Exchange Commission and investment management firms are going through a rough patch.
The SEC and buy-side firms have been in a way betrothed since the Investment Company Act of 1940. From the SEC: “This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations.”
The vast majority of investment managers would agree that regulation is necessary to weed out bad actors, uphold industry standards, and preserve investor confidence. And probably the buy side also would concede that the SEC has, on balance, done a reasonable job over the past 83 years — after all, the U.S. investment management industry has thrived over the long term.
The current resentment between the securities regulator and investment firms stems from SEC Chair Gary Gensler’s activist agenda, punctuated by a series of sweeping proposals aimed at equity market structure. Essentially, the SEC believes financial firms – buy-side, sell-side, and exchanges – aren’t adequately looking out for their end clients, i.e. retail investors; financial firms believe the SEC is overreaching and some of its proposed rules would reduce market liquidity and increase costs for all market participants, retail investors included.
Securities brokers and exchanges, as market intermediaries, have loudly and clearly voiced their dissent about the SEC proposals, in comment letters, at industry conferences, and in the media. The buy side has been a bit more reserved, but a recent panel at the Security Traders Association’s market structure conference highlighted that investment firms also feel the regulatory roadmap is directing the industry toward a wrong turn.
In the Oct. 12 panel, A Buy Side Guide to Navigating the SEC, panelists noted that SEC Chair Gensler has passed more than double the number of rules as previous Chairs, and the industry has not been given enough time to comment on proposals.
It was noted that the SEC views self-directed investors and institutional investors differently; its rule proposals are meant to help self-directed investors, but they are spilling into unintended consequences of hurting institutional investors.
Another point made was that the SEC should allow the industry to opine on regulatory ideas and create an initial proposal that is closer to what regulators and industry would both be on board with. Rather, the SEC has proposed some extreme proposals, leaving the industry with the only option of requesting withdrawal because there is no viable way to improve them.
The panel circled back to the Investment Company Act of 1940, noting a long history of the buy side and its regulator working together collaboratively, because they have the same end client – ‘mom and pop’ investors. That collaboration isn’t what it used to be.
For its part, the Investment Company Institute (ICI) has expressed its reservations about SEC rulemaking. Regarding the equity market structure proposals, the trade group said in March: “ICI urges the Commission to take a considered approach and thoughtful pace regarding its market structure proposals…. We are ready to work with the Commission on these important rulemakings and request that it phases in any new rules over a multi-year period based on an implementation schedule subject to public notice and comment.”
Can the SEC and the buy side improve their relationship? In the short term at least, much will depend on the regulator’s next moves on its proposals, which are expected to be revealed by year-end. Indications of compromise would warm things up; the SEC doubling down on flexing its muscles would create more distance and a more uneasy partnership.
(STA panel discussion recaps courtesy of Williams & Jensen, PLLC, a partner of the Security Traders Association.)
