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IAA Advocacy on SEC Rulemaking

April 15, 2022

On April 11, the IAA submitted comments to the SEC on three major rule proposals affecting investment advisers – cybersecurity, beneficial ownership, and T+1 settlement. They are on our website under Issues & Advocacy/Comment Letters and summarized below.

These letters were all submitted on very short deadlines. Last week, we joined 24 other trades in a letter to SEC Chair Gary Gensler taking issue with the numerous concurrent 30-day comment deadlines and calling on the SEC to provide a more reasonable time for stakeholder input. That effort follows an earlier letter submitted by 13 trades (including the IAA) calling for an extension of the private funds and Form PF proposals. The IAA also recently published an op-ed in InvestmentNews arguing that if regulators want meaningful feedback, they should bring back 60-day comment periods. We hope these efforts will bear some fruit as the SEC continues to move forward with its ambitious rulemaking agenda.

Brief Summary of IAA Letters Filed this Week

Cybersecurity Proposal. Our letter notes that advisers are already required to – and do – have cybersecurity policies and procedures. We therefore support the proposed cybersecurity risk management policies and procedures with recommended improvements.

We have significant concerns, however, about the proposed reporting of incidents to the Commission within 48 hours as well as the details proposed to be included in public disclosures. While we generally support reporting and disclosure, we are concerned that these requirements, as proposed, would impede advisers’ efforts to respond to cybersecurity incidents as they are occurring, provide a roadmap to threat actors, and impose unnecessary operational and compliance burdens.

As an initial matter, we believe that any reporting requirements should not be duplicative of or inconsistent with other breach notification requirements that advisers are subject to. Accordingly, we strongly recommend that the Commission coordinate with other federal regulators towards adopting a uniform risk-based federal requirement for reporting cybersecurity and data breach incidents.

We believe that the Commission severely underestimates the costs and burdens that would be imposed on investment advisers, particularly smaller firms, by certain elements of the Proposal. Accordingly, we recommend that the Commission exclude smaller advisers from the reporting requirement altogether and also that the Commission undertake a more robust and accurate assessment of the costs, burdens, and economic effects that would be placed on advisers of all sizes, including a holistic assessment of the cumulative costs of existing and anticipated regulation on advisers.

Beneficial Ownership Modernization. The SEC proposes to modernize the beneficial ownership reporting regime for the securities markets, which hasn’t been updated in decades, including:

  • Significantly accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports
  • Expand the application of these reporting requirements to cash-settled derivative securities
  • Clarify the circumstances under which two or more persons have formed a “group” whose beneficial ownership will be aggregated for reporting purposes

We believe that the accelerated timelines pose operational challenges and do not provide sufficient time for accurate and complete reporting. The short deadlines may also exacerbate free riding and front running. Accordingly, we make specific recommendations to change the proposed filing schedule to provide filers with a more reasonable amount of time, create consistency, and reduce unnecessary confusion.

We oppose deeming holders of certain cash-settled derivative securities to beneficially own the reference securities just as if they held such securities directly. This treatment of cash-settled derivatives is unnecessary, unclear, and inconsistent with the purpose behind the beneficial ownership reporting regime.

We have significant concerns that the proposed definition of a group is overbroad and could chill valuable shareholder engagement, including relating to corporate accountability and sustainability issues. We make recommendations to address these concerns.

T+1 Settlement Cycle. The IAA supports the Commission’s recent proposal to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”).

We offer several recommendations that we believe will better balance the Commission’s desire for information with the technical and operational realities of how investment advisers engage in securities trading and obtain and retain trading information. As the Commission considers the proposed changes, we also ask it to examine the impact the Proposal will have on small and mid-sized firms, which make up the vast majority of SEC-registered investment advisers.

The IAA also has concerns about statements in the Proposal indicating that the Commission’s goal is to shorten the settlement cycle further by achieving a same-day settlement cycle (“T+0”). We believe it is more pragmatic to reduce the settlement cycle in stages to ensure that the U.S. and global markets can adequately adapt. We ask that shortening the settlement cycle to T+0 not be considered until the Commission has allowed a T+1 settlement to be fully implemented and has gathered sufficient data to support taking that action.

We encourage you and your colleagues to get involved in the IAA’s comment letter workstreams.

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