Members of our Investment Management team attended the Investment Management Conference hosted by the Investment Company Institute last month, one of the marquee gatherings for investment management professionals, board members, and service providers. This year’s conference featured remarks from William Birdthistle, the Director of the Securities and Exchange Commission’s (“SEC”) Division of Investment Management; Mark Uyeda, SEC Commissioner; and many other distinguished speakers.  Overall, conference sessions covered topics ranging from the recent SEC rule proposals to the focus of state Attorneys General on Environmental Social & Governance (“ESG”) investing.  While the conference offered loads of excellent insight and knowledge, below are three takeaways from the conference:

 1.     Break-neck Rulemaking Pace.  

      If not clear before the conference, it became crystal clear throughout the conference that the industry participants are concerned with the bombardment of new SEC rule proposals. With sessions titled “Sprinting a Marathon: Keeping up with the SEC’s Rulemaking Activity”, “Fund Governance in an Era of Regulatory Deluge”, and “Addressing Compliance Challenges in Today’s Unprecedented Economic and Regulatory Environment”, a substantial part of the conference focused on understanding how industry participants can keep up with the SEC’s break-neck rulemaking pace.  Notably, a session titled “The SEC’s History: Perspectives on a Changing Regulatory Landscape” featured three former Directors of the Division of Investment Management, each of whom said that the landscape of today’s SEC was markedly different to that of the SEC when these panelists were directors.  These panelists highlighted the appearance of a growing importance of politics within the SEC and the SEC’s focus-shift away from a regulation and disclosure regime to proscriptive action rulemaking regime.

 2.     Evolving ESG Landscape.

     ESG investing, a hot button topic in the investment management industry, was also a major topic at the conference.  In particular, the conference focused on how states have reacted to ESG investing – a notable deviation from the general focus on federal rules and regulations.  In a session titled “The Topic Du Jour: Is ESG Investing Financial, Political, or Both?”, panelists discussed how state actions are affecting ESG investing within the industry.  Particularly, the panelists discussed how states have different view on the use of ESG in making investment decisions, with Democratic-controlled states generally believing ESG is an important factor and Republican-controlled states generally questioning whether considering ESG is in the best interest of the client. The panelist noted cases and theories brought and posed by state Attorneys General in largely Republican-controlled states that target investment advisors who use ESG factors in their investment decisions.

     While the claims brought by the Attorneys General have varied, the underpinning of each claim argues that investment advisors are breaching their duty of care or loyalty to their clients by using ESG factors when making investment decisions. To date, however, there have been very few cases brought against investment advisors using these theories. Moreover, the panelists all agreed that, despite these theories brought by states, so long as investment advisors make investment decisions based on factors they believe are economically relevant, investment advisers should not be too concerned at this time.

 3.     Examinations and Enforcement 

 A conference favorite is the discussion with the SEC staff on their views of examinations and enforcement, “Expecting the Unexpected: Looking Backward and Forward at the EXAMS and Enforcement Divisions”. Priorities for examination include looking at private funds (including conflicts of interest, code of ethics issues and misuse of non-public information), advisors with systemic risk (including heavy use of swaps), valuations of investments, promoting the use of ESG and gate keepers (boards, administers and auditors) missing violation issues. The SEC staff members noted that 70% of examinations resulted in a deficiency letter, 20% with no comment and 10% being referred to enforcement. On the enforcement side, SEC staff members indicated that penalties should be high enough that it is not just a cost of doing business and that CCOs will be held liable if they are part of or try to cover up wrongdoing. The SEC staff members also indicated that while enforcement staff may be assigned to an examination, it is not a sign of a problem and that notice will be given that enforcement staff is participating in the examination.

 By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton

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