On October 26, 2017, the U.S. Department of the Treasury (Treasury) released a report that examined the current regulatory framework for the asset management and insurance industries and made recommendations to ensure the regulatory framework is aligned with the “Core Principles” for financial regulation established in Executive Order 13772.

The report detailed Treasury’s recommendations on a number of topics including systemic risk and stress testing; liquidity risk management; regulation of derivatives usage; regulation of ETFs; business continuity and transition planning; dual registration with the SEC and the Commodity Futures Trading Commission (CFTC); disclosure requirements under the federal securities laws; and the Department of Labor’s (DOL) fiduciary rule.

Systemic Risk and Stress Testing

In its report, Treasury noted that the global financial crisis raised questions about how to address financial stability and create a regulatory framework to mitigate systemic risk. Treasury recognized that, with the passage of the Dodd-Frank Act and regulatory initiatives undertaken by the Financial Stability Board and other bodies, the resulting regulatory framework focuses on the assessment of systemic risk posed by specific financial entities and employs tools, including stress testing and risk management programs, “to address entities posing a heightened risk to the stability of the financial system.”

Treasury’s position, according to the report, is that “entity-based systemic risk evaluations of asset managers or their funds are generally not the best approach for mitigating risks arising from asset management.” Instead, Treasury recommends that federal regulators focus on “potential systemic risks arising from asset management products and activities, and on implementing regulations that strengthen the asset management industry as a whole.” The report also stated that Treasury does not support “prudential stress testing of investment advisers and investment companies as required by Dodd-Frank.” To this end, Treasury supports legislative action to amend Dodd-Frank to eliminate these stress testing requirements. However, “[i]n the alternative, Treasury supports the view that the stress testing provisions of Rule 2a-7 for money market mutual funds and Rule 22e-4 on liquidity risk management programs . . . satisfy the spirit of Dodd-Frank’s stress testing requirements.”

Liquidity Risk Management

Treasury expressed general support for a limitation on mutual fund investments in illiquid securities, but did not agree with the SEC’s regulatory approach to implementing such a limit nor the timeframe with which the SEC seeks to implement such limit. Treasury stated that it supports the 15% limitation on illiquid assets for mutual funds in Rule 22e- 4 under the Investment Company Act of 1940. However, Treasury stated that it prefers that the SEC adopt a principlesbased approach to liquidity risk management rulemaking and “rejects any highly prescriptive regulatory approach . . . such as the bucketing requirement.” To this end, Treasury stated that the SEC “should take appropriate action to postpone the currently scheduled December 2018 implementation of Rule 22e-4’s bucketing requirement.”

Derivatives

Treasury expressed general support for modernizing the regulation of the use of derivatives by funds but did not agree with all elements of the SEC’s proposed approach to updating the regulatory framework. Treasury stated that the SEC should consider a derivatives rule that would include a derivatives risk management program and an asset segregation requirement, but reconsider what, if any, portfolio limits should be part of the rule. Treasury also stated that the SEC should reconsider the scope of assets that would be considered qualifying coverage assets for purposes of the asset segregation requirement.

ETFs

In order to streamline the ability of entrants to access the market, Treasury recommended that the SEC move forward with a “plain-vanilla” ETF rule that allows entrants to access the market without the cost and delay of obtaining exemptive relief orders.

Business Continuity and Transition Planning

Treasury discussed the SEC’s June 2016 rule proposal related to business continuity and transition plans, as well as the historical regulatory requirements related to such plans. Treasury recommended that the current SEC proposal on business continuity and transition planning be withdrawn.

Dual CFTC and SEC Registration

Treasury summarized the regulatory history requiring certain entities to register with both the SEC and the CFTC. Among Treasury’s recommendations with respect to dual registration issues were the following: • The CFTC should amend its rules to provide that an investment company registered with the SEC and its adviser are exempt from dual registration and regulation by the CFTC as a CPO. To address concerns of de facto commodity pools operating without sufficient oversight, Treasury stated that the CFTC and the SEC should work together to identify a single regulator for these entities, with the goal that oversight of these entities will either remain with the SEC or be transferred to the CFTC and the National Futures Association (NFA). • The CFTC should amend its rules to exempt private funds and their advisers from registration as CPOs if the advisers are subject to regulatory oversight by the SEC. Treasury also recommended that the CFTC review and determine what, if any, exemptions should be made available for SEC-exempt reporting advisers.

Disclosure Requirements

Treasury summarized the disclosure requirements under the federal securities laws and recent efforts to modernize these requirements. Among Treasury’s recommendations with respect to disclosure issues were the following:

• The SEC should finalize its proposed rule to modernize shareholder report disclosure requirements and permit the use of implied consent for electronic disclosures.

• The SEC, the CFTC, self-regulatory organizations and other regulators should work together to rationalize and harmonize the reporting regimes. Treasury recommended that duplicative forms be combined and unnecessary or inconsistent data collection be eliminated. Additionally, Treasury stated that regulators should continue to utilize structured data where appropriate.

• The SEC should prioritize annuity-related disclosure reform by proposing a rule permitting a variable annuity summary prospectus and a streamlined prospectus update, while continuing to provide appropriate disclosure to investors. Treasury also recommended that the SEC take steps to improve the efficiency and effectiveness of the regulation of insurance products under its jurisdiction.

DOL Fiduciary Rule

Treasury believes it is appropriate to delay full implementation of the DOL’s fiduciary rule until the relevant issues, including costs of the rule and exemptions, are evaluated and addressed to best serve investors, and believes that such assessment and resolution of standard of conduct issues should include participation by the SEC and other regulators. Treasury believes that the SEC and the DOL should work together to address standards of conduct for financial professionals who provide investment advice to IRA and non-IRA accounts. In addition, Treasury recommended that the SEC and the DOL engage with state insurance regulators regarding the impact of the standards of care on the annuities market.