For many years after the global financial crisis, markets were overhauled worldwide, but arguably the most existential waves of new rules for alternative asset managers rippled across Europe, creating new guardrails and checks and balances against the excessive risk-taking of the type that led to the crash.
Today, however, the pendulum has decisively swung back across the Atlantic. As regulators in Europe are trying to balance rule making with avoiding overly burden- some requirements, the Securities and Exchange Commission (SEC) has mounted a radical campaign for greater oversight and prescriptive control in lieu of taking a more principles-based approach.
Since 4Q 2021, the SEC has released dozens of proposals, some of which represent an alarming overreach in the supervision of the asset management industry and its ecosystem of service providers.
In addition to proposals to change the US market structure, the SEC has proposed three rules that mark a sea change for advisers and the fund management industry.
Private fund adviser rules
The proposal to adopt and amend certain rules applicable to advisers of private funds will alter the longstanding, widely used business arrangements of private funds. The most egregious features include restricting fee structures.
The proposal also offers no grandfathering for existing contracts, which would require a costly re-papering exercise by the industry. It would also alter the liability standard leading to some advisers no longer offering certain strategies.
Securities dealer proposal
The SEC has proposed relatively low determining thresholds, which if met would mean that an investment adviser or fund would need to be registered as a securities dealer even though they do not engage in traditional dealing activities.
This could significantly impact the trading and investment strategies, operations, risk management, compliance and reporting functions of AIMA members. It also risks damaging US treasury market liquidity by discouraging bond trading.
The UK
Away from the tense mood in the US, the UK’s regulatory environment is enjoying a renaissance. The broad package of rule changes – known as the Edinburgh Reforms – was announced late last year and promised to “drive growth and competitiveness in the financial services sector”.
The Chancellor of the Exchequer used his annual Mansion House speech to unveil a swath of more detailed proposals for amendments to the rules governing UK’s investment industry.
The main three changes related to the alternative investment industry bring welcome reforms to short-selling rules, the re-bundling of payment for research and securitisation. For short selling, the government will replace the public disclosure regime based on individual net short positions with an aggregated net short position disclosure regime.
It will also double the threshold for net short position reporting to 0.2% of issued share capital. For research payments, asset managers will be allowed to buy research on a bundled basis. This is encouraging given our efforts to encourage authorities on both sides of the Atlantic to come up with a workable solution to the clash of their respective rules on research payment.
Finally, the UK is changing the securitisation framework by narrowing the institutional investor definition to exclude non-UK AIFMs, removing any uncertainty.
In summary
The directions of travel for the regulatory environment of the UK and the US are, for now, clear and juxtaposed. In the US, the industry is bracing for a worst-case scenario that is widely expected but may yet be avoided.
In the UK, we expect the proposed changes to come be finalised ahead of the next general election, which is encouraging.
Whether the easy comparison of the alternative investment markets in these two jurisdictions – with one thriving and another being stifled – will give the powers that be in the US pause for thought is yet to be seen, but it’s unlikely that the pendulum of regulatory scrutiny will swing away any time soon.
Jack Inglis is chief executive of the Alternative Investment Management Association (AIMA)
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