SEC Commissioner Uyeda Criticizes "Unrealistic" Regulatory Approach

SEC Commissioner Mark T. Uyeda criticized the SEC’s current regulatory approach, stating that recent rulemakings have been focused on "unrealistic expectations of how the world functions and how it ought to be."

In an address before the ICI Investment Management Conference, Mr. Uyeda referenced the SEC’s recent set of cybersecurity-related proposals (see previous coverage here, here and here) for employing an economic analysis that only considers the proposals’ costs and benefits "in isolation" and then asking commenters to identify where the proposals overlap. By failing to address the implications of "multiple and overlapping rulemakings," Mr. Uyeda predicted that smaller firms within the asset management industry will likely lack the resources to achieve compliance. Mr. Uyeda said this will reduce investors' investment options.

Open-ended Fund Liquidity

Mr. Uyeda questioned whether the type of run risk caused by "liquidity transformation," is unique to liquidity in open-end funds or if it can also be experienced by banking organizations under prudential regulation. Mr. Uyeda stated that while liquidity transformation in funds has prompted regulatory action, he advised regulators to be wary of unintended consequences of a "prudential approach" to fund regulations. He warned that the resulting impact could cause over-regulation of investment companies to the extent that they are less desirable as 401(k) options and cause less-regulated investment options to "fill the gap."

Before taking further regulatory action, Uyeda urged the SEC to use information now publicly available through Form N-PORT to inform its decisions on policy and rulemakings and to monitor industry trends. In particular, he questioned the SEC’s claims made in its open-end fund liquidity proposal, that mutual funds during March 2020 created systemic risk and were unable to meet their liquidity needs. Instead, he argued that the SEC had the means to respond with emergency action (e.g., interfund lending or short-term funding) but chose not to.

ESG

Mr. Uyeda expressed concern over the use of ESGs because of their (i) potential to underperform, (ii) premium costs to investors and (iii) use by regulators to "force particular investment and operational outcomes." Mr. Uyeda stated that the current disclosure regime "works well" in requiring funds to disclose material information to investors and that if investors wish to pay for ESG strategies they are already able to do so.

As an example of a "cautionary tale," Mr. Uyeda pointed to the EU’s sustainability finance regime, which he said employs a "sprawling" regulatory approach, complete with the 500-page EU Taxonomy Regulation to establish a common understanding of "environmentally sustainable" economic activities. Mr. Uyeda stated that the EU faces significant implementation challenges and conflicting standards and interdependencies.

Fund Names

Mr. Uyeda questioned whether the "Fund Names" proposal (see previous coverage) is necessary. The proposal, which requires funds with certain names to adopt a policy to invest 80 percent of their assets in the fund named investments, would be extended to investments that imply "particular characteristics." Mr. Uyeda criticized the costs of implementation and asserted that "particular characteristics" is not defined and would rely on subjective judgments.