A pause in new SEC rulemaking this year has given fund directors some relief from the hectic pace of 2023, but many boards may still be too busy overseeing the implementation of past rules to notice much of a difference.
Boards came into 2024 worried about highly controversial SEC rule proposals whose eventual approval seemed inevitable.
The scope of some proposals, and their incursion into areas the SEC had never before attempted to regulate, elicited outrage from the industries affected, and from boards and fund advisers who accused the SEC under chair Gary Gensler of trying to fix problems that existed more in theory in the real world.
In the process, regulatory opponents said, the SEC was overloading the industry with costs and compliance requirements vastly out of scope with the issues they were designed to address.
Vigorous opposition from affected industries, high-profile losses in court, opposition from both parties in Congress and cautionary statements from the White House eventually forced the SEC to back down on many of the most controversial proposals.
Losses in court – including a decision in June by the Fifth Circuit Court of Appeals that overturned the SEC’s private funds rule and Supreme Court decisions that curtailed SEC administrative judgments and the deference federal courts owed to the expertise of regulatory agencies –severely curtailed the SEC’s regulatory agenda.
“The SEC has had some defeats this year, though, in its rulemaking,” according to Gwendolyn Williamson, a partner at Faegre Drinker.
The SEC has not proposed a single new ’40 Act regulation during 2024, though a number of high-impact, fund-specific proposals are still waiting to be finalized, rejected or rewritten for re-issuance at a later time.
“In April, everybody was sitting, waiting, expecting a ton of rules to be adopted. And then they just weren’t,” said Molly Moynihan, a partner at Perkins Coie.
Experts warn that the SEC’s Examinations and Enforcement divisions remain as active as ever and there is no guarantee the commission will let rules it has already proposed hang fire until after the election.
“It is true that there still are a lot of outstanding proposals from the SEC that stand to affect fund managers and fund boards,” Williamson said. “Not that this directly affects registered funds and their boards, but it sort of undermined what this administration has been trying to do in certain ways.”
SEC pulls back
Observers also attributed the slowdown to last year’s forceful industry opposition to the SEC’s rulemaking, especially against the open-end fund liquidity rule proposal that would have mandated swing pricing and a hard close for all mutual funds. The SEC signaled in its spring rulemaking agenda that it plans to reconsider and re-propose some of its most-criticized proposals from the past few years, including those on open-end fund liquidity and predictive analytics.
It’s not clear how much of the drop-off can be attributed to public opposition and how much to losses in court, but the reduction in regulatory pressure is a relief for the fund industry as a whole, Moynihan said.
“I would say that boards have breathed a sigh of relief because they have dealt with the implementation of a number of rules … and now find the spigot has been turned off,” Moynihan said. “So they have more chance to digest what’s been done and less demand to prepare for new and upcoming rules.”
In the boardroom, the cessation of new rule proposals has allowed fund compliance and legal teams to shorten their regular regulatory updates, which had ballooned in 2023, according to Moynihan.
“A third of our time was being spent on compliance, in addition to routine reporting,” she said. Now, “instead of spending 45 minutes to an hour on compliance presentations, that time can be devoted to more substantive matters,” Moynihan said.
Compliance staff have also seen their workloads ease up, according to Williamson.
“The reports of chief compliance officers about also feeling overwhelmed with the potential implementation of outstanding rule proposals – that sort of tone has backed down,” Williamson said.
Just because there are no new regulatory updates coming in doesn’t mean boards’ regulatory work instantly goes away, however.
Board workloads remain high
“I don’t know that the workload has really decreased a lot, because a lot of the rules that were put in place, that went final, are now being implemented,” according to Barry Benjamin, an independent trustee of the Morningstar Funds.
He pointed to regulations like the valuation and derivative rules, which both had implementation deadlines in 2022, and required boards to create entirely new reporting frameworks that they are still fine-tuning today.
“In any new rule, it takes some time for people to get comfortable with the reporting that goes with it,” Benjamin said. “So that I think is still being digested from some of the fast pace of rulemaking.”
To a lesser extent, boards have also been overseeing their advisers’ implementation of the tailored shareholder reports rule whose compliance date passed July 24, and the updated names rule, which the SEC adopted at the end of last year and which has an implementation deadline of December 2025.
The detailed requirements and long implementation periods of recent SEC rules have meant that at any given time, boards have been dealing with the effects of decisions the SEC made years ago. As a result, many boards may not find their actual workloads lightening for months or years, if it happens at all, according to Hassell McClellan, chair of the John Hancock Funds.
“A big ocean liner just doesn’t immediately come to a stop even though you turned off the engines,” McClellan said. “We’ve still got lots of things to do. We’re still moving through the water.”
Still, for board watchers like Moynihan, this level of regulatory workload feels like a return to normalcy after three years of nonstop intensity.
“It’s not like [last year] where you’d have a whole agenda section on SEC rule implementation,” Moynihan said. “I think it goes back to more as things have been in the past, where there’s always something out there that needs to be complied with, but it’s not pressing.”
