SEC IM Director Describes Trends in Asset Management

SEC Director of the Division of Investment Management ("Division") William Birdthistle described three trends in the asset management industry that require the SEC's "far-reaching vigilance and prompt concentration." In a speech before the ICI Investment Management Conference, Mr. Birdthistle highlighted risks concerning technological advancement, changing demographics, and rapid growth.

Technological Advancement

Mr. Birdthistle said that the "accelerating pace of technological advancement and complexity . . . can present new challenges to adviser’s obligations under the securities laws that warrant the careful attention of regulators." He stated that "asset managers and their senior leadership now must balance bottom-line investment return and performance while simultaneously facing an ever-growing frontier of, for example, cyber security risks that loom over their operational integrity and the protection of their clients’ data and assets."

Mr. Birdthistle said that the Division is devoting "attention to the importance of asset managers’ responsibilities in light of certain technological capabilities, as a complement to more traditional areas of regulatory focus, such as conflicts-of-interest management and effective disclosure."

Mr. Birdthistle highlighted regulatory efforts to account for the associated risks, including proposed rulemakings to:

• require firms to (i) take steps to mitigate and disclose cybersecurity risk, (ii) enhance adviser and fund disclosures of cybersecurity incidents and (iii) report such incidents to the SEC (see previous coverage);
• update Regulation S-P to account for the “tremendous developments” in how customer information is gathered and stored since Regulation S-P was first adopted (see previous coverage); and
• amend the investment adviser custody rule to account for advancements in custody, such as the use of blockchain technology as a means to record ownership and transfer assets (see previous coverage).

Changing Demographics

Mr. Birdthistle asserted that asset managers will need to account for changing demographics by (i) accommodating Baby Boomers’ appetite for investment risk as they reach retirement in the coming decade and (ii) offering the “highest quality disclosure available” to the new generation entering the workforce.

He said that the Division proposed the "Names Rule" (see previous coverage) to improve disclosures by an 80 percent investment policy for any fund with a name that includes terms suggesting that the fund focuses in investments with particular characteristics. Mr. Birdthistle stated that it’s “exceedingly important” that the meaning that a fund name conveys and investor expectations are aligned.

Rapid Growth

Mr. Birdthistle highlighted the rapid growth in the number of American investors, stating that more than half owned mutual funds in 2022 as opposed to 25 percent in 1990. Mr. Birdthistle attributed the growth in market size to two factors: (i) the shift away from defined benefit pension plans and towards contribution retirement savings plans and (ii) the increase in online savings and investment platforms that offer at-home access to brokerage and advisory accounts.

To meet the increased demand, Mr. Birdthistle highlighted that advisers are (i) offering more types of services and a wider variety of investment products and (ii) are experiencing pressure on fees. He warned that service providers may be able to gain access to clients’ personal information and potentially expose clients to identity theft or other harms if the information is mishandled. Mr. Birdthistle said that the SEC is seeking to address this through a rule proposal that would require firms to (i) perform due diligence prior to engaging service providers and (ii) continue to monitor them (see previous coverage).