As an eventful 2022 came to a close, Fund Directions spoke with several trustees and counsel about what they expected 2023 to bring. For nearly everyone, three topics stood out as the most important on the agenda: regulation, hybrid meetings, and the economy.
This month, FD takes a look at how each of those storylines could affect boards and what trustees are expecting. First up: regulation.
Many fund complexes found themselves having to juggle faster than usual during 2022 as they raced to implement the new valuation and derivatives rules while also responding to a litany of SEC proposals.
The derivatives and valuation rules, with whose implementation dates funds had to comply by August and September, respectively were, by far, the highest priority on fund-board agendas, however.
Neither of the rules included a one-and-done implementation plan that would let fund boards move on to other issues once they’d approved changes. Both require that boards receive, review and approve regular reports from a valuation designee or derivatives risk manager to whom the new rule allows the board to delegate primary responsibility, but only if the board can demonstrate it is actively overseeing that process.
Most boards will have begun 2023 watching to see how well those function in practice, especially the process and format of the report to the board, which fund complexes have had to design from scratch.
There are no established formats for derivatives risk management reports, so fund boards have mostly had to figure out for themselves how to design a report that packs into a single readable package all the data board members need to evaluate the work, according to Sullivan & Worcester partner Nicole Crum.
“It may be useful for boards to be thoughtful about the reporting and work collaboratively with management and for directors to feel empowered to say, ‘Hey, what does this mean?’ or, ‘I don’t understand this,’” Crum said.
Making those reports informative and useful without overloading them has been a priority for the boards of UBS Funds, the Mercer Funds, and the Morgan Stanley Pathway Funds, according to Adela Cepeda, who sits on all three.
“As we begin to monitor the results, there will be focus on having the most constructive reporting, making sure all the key metrics are properly presented,” Cepeda said.
While boards were able to meet the third-quarter 2022 implementation deadlines for the two rules, many fund boards would still have been working on refinements well into 2023 even without the distraction of the SEC’s unusually prolific and controversial rulemaking effort during 2022.
“There’s still a lot of work in terms of optimizing the board reporting and going back and making sure that third-party vendors are providing the best pricing possible,” said Liz Levy-Navarro, an independent director of the Wilshire Mutual Funds.
The most heated debates of 2022 centered around rules proposed about climate-risk disclosure and other issues aimed more at public companies than fund advisers. But fund-focused rule changes such as the changes to rules governing sustainable investing and requiring board oversight of service providers fueled increasingly intense opposition inside the industry— even before the wildly unpopular proposal that would mandate swing pricing for all open-end funds.
“2022 was, to my mind, remarkable with respect to the volume of regulation that came into effect and regulation that’s been proposed,” said Barry Barbash, a senior counsel at Willkie Farr & Gallagher and a former director of the Division of Investment Management. “It’s stunning.”
Trustees expect 2023 will see more growth in both the required workload and unwelcome controversy.
“A lot of fund directors, given the nature of our roles, are absolutely thinking about the new rules, the regulations, and how we can continue to make sure not only do we implement the new ones that have already required implementation but also keeping an eye on what’s coming down the pipe,” said Dorri McWhorter, an independent director of the William Blair Funds.
For some, the conclusion from the past year was that the SEC under Gary Gensler and the fund industry are on a collision course.
Barbash predicted that 2023 would be a year of regulatory confrontation, as industry players fight to rein in a regulatory agenda that even supporters criticize as overly ambitious.
“I think that gets played out on [Capitol] Hill, I think it gets played out in the comment process, and I think ultimately, if the rules are adopted, it gets played out in the courts,” he said.
