Remarks at the NSCP National Conference

Thank you for the introduction, Lisa [Crossley]. I am pleased to join you today at the annual conference for the National Society of Compliance Professionals (“NSCP”). During a period of unusually high rulemaking activity – a period not predicated by market-wide disruptions or systematic fraudulent activities by public companies and financial intermediaries – your focus on “for compliance, by compliance” is well-timed. Should the Securities and Exchange Commission (“Commission”) complete its full regulatory agenda, compliance professionals will bear the brunt of the immense burdens placed, or to be placed, on regulated entities. These remarks reflect my individual views as a Commissioner at the Commission and do not necessarily reflect the views of the full Commission or my fellow Commissioners.

Background of the Compliance Function and CCO Liability

This coming December will mark twenty years since the adoption of Rule 206(4)-7[1] under the Investment Advisers Act of 1940 and Rule 38a-1[2] under the Investment Company Act of 1940 (“Investment Company Act”).[3] These rules require the adoption and implementation of written policies and procedures reasonably designed to prevent violation of the federal securities laws, an annual review of those policies and procedures, and designation of a chief compliance officer.[4]

When first adopted, the Commission explained that “it is critically important for funds and advisers to have strong systems of controls in place to prevent violations of the Federal securities laws and to protect the interests of shareholders and clients.”[5] The rule recognized the important role played by compliance professionals. Since that time, the importance of the compliance function has only increased.

Of course, many financial services firms had developed compliance functions well before the adoption of the Commission’s compliance rules. In fact, the NSCP was formed in 1986 to “support and promote the growing securities industry compliance profession.”[6] The Commission’s rules not only mandated the compliance function through policies and procedures, but also created an independent basis for holding individuals and firms liable for compliance failures.

Understandably, compliance professionals might be concerned about how the Commission enforces those rules. Are the rules simply an opportunity for an exercise of “gotcha” – that is, another way to make enforcement referrals – especially without having to show any investor harm or evidence of fraud? Or would the Commission see the new rules as an opportunity for funds and advisers to improve compliance and view chief compliance officers (“CCOs”) as key allies in the effort to protect investors?

In the decades that have followed, the Commission has placed increasing responsibility on firms and their compliance personnel. In addition to bringing enforcement actions against firms for failing to adopt and implement written compliance policies and procedures, the Commission has held CCOs liable under the theory that a firm’s compliance violations were caused by the CCO.[7] While it is understandable that certain types of misconduct on the part of a CCO can – and should – result in individual liability, the absence of any framework articulated by the Commission through which to analyze a CCO’s potential liability has been the source of a great deal of concern. According to a recent NSCP survey, nearly three-quarters of respondents were “concerned that regulators have expanded the role of compliance officers and the scope of their responsibilities in imposing personal liability.”[8]

Thus, it is unsurprising that many compliance professionals feel a sense of trepidation as to how the Commission will exercise its enforcement authority. Left with only the cursory details set forth in settled enforcement actions, the reasoning behind a particular decision to charge a CCO is often left to the collective imagination.

In a recent enforcement action against a CCO, one of my colleagues, Commissioner Hester Peirce, noted the lack of a Commission-issued framework for CCO liability.[9] In her statement, Commissioner Peirce applied a framework proposed by the Compliance Committee of the New York City Bar Association to “test how a CCO liability framework might work in practice.”[10] The NSCP also has issued its own framework for analyzing CCO liability.[11] Regulators should clearly describe the circumstances under which a CCO will be held liable for a firm’s violations of the federal securities laws. Therefore, NSCP’s efforts in this regard are appreciated, and I look forward to continuing to work towards providing more certainty to the hard-working compliance professionals tasked with implementing the Commission’s expanding rulebook.

With that in mind, I would like to discuss three issues facing compliance professionals today: (1) the large number of new or amended rules affecting the financial services industry; (2) the rapid succession of compliance dates stemming from these rules; and (3) the implementation challenges for compliance professionals.

Rules Affecting the Financial Services Industry

The past two years have been marked by a large number of proposed and adopted Commission rules. Many of these rules affect asset managers, including some that originated outside of the Commission’s Division of Investment Management. Let’s take a look back at some of these adopted rules, in chronological order:

1. November 2021: The Commission adopted amendments requiring a universal proxy card in all non-exempt solicitations involving contested director elections. [12] While the amendments do not apply to solicitations by registered investment companies and business development companies, the adopting release notes that an investment adviser’s fiduciary duty applies when it votes for the nominees listed on the universal proxy cards.[13] The practical effect of switching to universal proxy cards is a potentially increased workload for advisers. No longer is it a binary choice between one slate of directors or another, but now it involves selecting from a potential mix of candidates from both slates. If the dissident nominates four candidates, does an adviser vote for one, two, three, four, or none of them? If the adviser choses one or more dissident nominees, who does the adviser select from management’s candidates?
2. July 2022: The Commission amended the rules governing proxy voting advice businesses.[14] The Commission also rescinded certain guidance to investment advisers about the use of proxy advisors when voting proxies.[15] This reversed amendments and guidance that the Commission had adopted a mere two years earlier in 2020 and that generally were effective for only one proxy season prior to reversal.[16]
3. October 2022: The Commission adopted rule and form amendments that require mutual funds and ETFs to transmit summary shareholder reports.[17] Summary shareholder reports have the potential to provide investors with a more user-friendly and engaging presentation of key information about their fund investments. However, developing the form and style of new reports will require careful attention.
4. November 2022: The Commission adopted amendments to Form N-PX to increase the amount of information about investment company proxy votes, including the categorization by subject matter of the votes.[18] The Commission also voted to require institutional investment managers to report on Form N-PX how they voted proxies for say-on-pay votes for executive compensation.[19] Thus, institutional investment managers that file Form 13F will now submit a form that previously was reserved only for investment companies. Non-investment company advisers will need to develop policies and procedures for submitting Form N-PX.
5. February 2023: The Commission shortened the standard settlement cycle for equity transactions from two business days after the trade date ("T+2”) to one business day after the trade date ("T+1”).[20] A footnote in the adopting release makes clear that “an adviser that transacts with a broker-dealer that has policies and procedures pursuant to [new] Rule 15c6-2 may wish to evaluate whether its own policies and procedures are sufficient to ensure compliance with obligations requested by the broker-dealer.”[21] The footnote further advises that “the broker-dealer’s policies and procedures may provide that it generally should seek written assurances from the adviser that [the adviser’s] policies and procedures are sufficient to ensure compliance with obligations requested by the broker-dealer.”[22] Under the amendments, an adviser also will be required to make and keep books and records regarding certain transactions. The adopting release estimates that – of the 15,160 advisers registered with the Commission – close to 13,000 are likely to facilitate transactions that are subject to the new recordkeeping requirements.[23]
6. May 2023: The Commission required new disclosures regarding share repurchases for issuers required to file periodic reports under the Securities Exchange Act of 1934 (“Exchange Act”).[24] This includes listed closed-end funds filing annual and semi-annual reports on Form N-CSR. These funds will now need to disclose daily, instead of aggregated monthly, quantitative repurchase data. Additionally, the adopting release highlights that – with respect to corporate issuers – “newly available data may incentivize intermediaries, such as investment advisers, to develop the capacity to analyze the data and provide their analysis to retail or other clients.”[25] In other words, the Commission is now suggesting that investment advisers may need to build out the capacity to put those disclosures to use.
7. Also May 2023: The Commission amended Form PF to impose additional reporting requirements on large hedge fund advisers and private equity fund advisers.[26] While the adopting release claims that “the reporting requirements were…designed not to be overly burdensome,” it concedes that “at the margin, the heightened compliance costs for smaller advisers…may negatively affect competition.”[27]
8. July 2023: The Commission amended the money market fund rules, adding a new liquidity fee for institutional prime and tax-exempt funds when net redemptions exceed 5% of net assets.[28] The adopting release explains that this new framework “will require [funds] to update policies and procedures, implement operational and systems changes, and coordinate with third party vendors, among other things.”[29]
9. August 2023: The Commission adopted new rules for private funds and their advisers.[30] The Commission also changed Rule 206(4)-7 to require that the annual compliance review be documented in writing, which applies to all advisers and not just private fund advisers. The adopting release explains that “the availability of written documentation of the annual review should allow the Commission and the Commission staff to determine if the adviser is regularly reviewing the adequacy of the adviser's policies and procedures.”[31] This documentation “should promptly be produced upon request,”[32] which – in many cases – means “immediately or within a few hours of request.”[33]
10. September 2023: The Commission amended the “names rule” under the Investment Company Act.[34] The amendments significantly broaden the scope of funds required to adopt a policy to invest at least 80 percent of their assets in accordance with the investment focus of the fund's name. The amendments also update the rule's notice requirements and establish recordkeeping requirements. The adopting release notes that fund compliance officers are required to discuss any material compliance matter involving the names rule in annual reports to the board on the operation of funds' compliance policies and procedures.[35]
11. October 2023: The Commission adopted amendments that generally shorten the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G,[36] which are required to be filed by investment advisers when they exceed specified ownership thresholds. Asset managers will need to update systems for monitoring ownership levels on a more frequent basis. In particular, the monitoring for a Schedule 13G filing currently is an annual exercise, but asset managers will need to monitor on a quarterly basis under the amendments.
12. Also October 2023: The Commission adopted a new rule under the Exchange Act that requires certain persons to report information about securities loans to a registered national securities association.[37] To the extent that an investment company uses an agent for its securities lending program, the agent can file the reports under the rule. However, these costs could be passed on to lenders and beneficial owners,[38] so the ultimate costs to funds and advisers remains to be seen.
13. Finally in October 2023: The Commission adopted a new rule that requires institutional investment managers that meet or exceed certain specified reporting thresholds to report short position data and short activity data for equity securities.[39] The new rule applies to investment advisers exercising investment discretion over client assets, including investment company assets.

Have I tired you all out yet? The volume and breadth of these rules is staggering, but there are more proposed rules in the pipeline affecting asset managers and financial advisors. These rules cover areas as diverse as: (1) special purpose acquisition companies; (2) security-based swap execution; (3) climate-related disclosures for investors; (4) environmental, social, and governance disclosures by investment advisers and investment companies; (5) shareholder proposals; (6) outsourcing by investment advisers; (7) open-end fund liquidity risk management programs; (8) cybersecurity risk management for investment advisers and investment companies; (9) privacy of customer information; (10) safeguarding client assets; (11) the use of predicative data analytics; (12) registration for index-linked annuities, and (13) more amendments to Form PF.

Furthermore, other rule proposals, such as the four separate proposals regarding equity market structure and the various proposals affecting the Treasury markets, will also affect asset managers.

Compliance professionals will be on the front lines of implementing all of these changes. Given how business models and operating structures vary, there is no one-size-fits-all approach to complying with these regulatory developments. Each firm will need to expend valuable resources to analyze a new rule and implement its approach accordingly.

Compliance Dates

Complicating this process is the fact that the compliance dates adopted by the Commission have not left much breathing room. I am disappointed that the Commission has not paid more attention to setting implementation deadlines in a thoughtful and orderly manner.

Put simply, the upcoming compliance calendar is daunting. Here are some deadlines to which you can look forward:

1. November 2023: Investment advisers must comply with the new requirement to document annual compliance reviews in writing.
2. Early 2024: Beneficial owners must comply with the shortened Schedule 13D filing deadline and amended disclosures. The final date is triggered off of publication in the Federal Register – which has not yet occurred – but when it is published, affected persons will have 90 days to comply.
3. April 2024: Firms must comply with certain provisions of the new money market fund rule, including the increased daily liquid asset and weekly liquid asset minimum liquidity requirements, as well as the discretionary liquidity fee framework for non-government money market funds.
4. May 2024: Firms must comply with the transition to a T+1 settlement cycle, including the various rules related to that transition. Market participants asked for an implementation date in September 2024, so hopefully the technological and other changes will be fully tested and ready to be put in place.
5. June 2024: Private fund advisers must comply with the amendments to Form PF. Firms must comply with other aspects of the new money market fund reforms, including the amendments to Forms N–MFP and N–CR. At the same time, firms will need to comply with an amendment regarding how money market funds categorize their portfolio investments on their websites.
6. July 2024: Investment companies must comply with the new summary fund shareholder report rule.
7. August 2024: Institutional investment managers and funds will be required to file their first reports on amended Form N–PX.
8. September 2024: Listed closed-end funds must comply with the new disclosure and tagging requirements regarding share repurchases. Advisers with more than $1.5 billion in private fund assets must comply with portions of the new private fund advisers rule, including the adviser-led secondaries rule, the preferential treatment rule, and the restricted activities rule. Beneficial owners, including investment advisers with investment or voting discretion, must comply with the revised Schedule 13G filing deadlines, which will be required on a quarterly, not annual, basis.
9. October 2024: Institutional prime and institutional tax-exempt money market funds must comply with the new mandatory liquidity fee framework.
10. December 2024: Private fund advisers will need to comply with the new sections that have been added to Form PF.
11. March 2025: All private fund advisers, including those with assets under $1.5 billion, must comply with all provisions of the new private fund advisers rule.
12. December 2025: Larger investment companies, meaning those in fund families with at least $1 billion of collective assets, must comply with the amended fund names rule, while smaller funds must comply by June 2026.

If any of the pending proposals are adopted, the compliance dates for those rules likely will overlap with these existing obligations. You have your work cut out for you.

Implementation Challenges

The sheer volume of rulemaking, combined with the rapid succession of implementation dates, will stretch the resources of firms. Most of the rule changes make no distinction between larger and smaller firms with respect to deadlines. By requiring smaller firms to comply at the same time as larger firms, it would not be surprising if the smaller firms incur disproportionate costs, which would create additional barriers to new entrants and potentially increase the pace of consolidation as firms seek economies of scale. This would be an unfortunate result for investors and the broader capital markets.

Last week, an industry publication reported that the rapid pace of rulemakings is “intensifying industry competition for compliance staff…”[40] The article notes that “many firms are… looking to bring on more operations, administrative and project management staff to ensure compliance with the new rules,” and “[s]ome firms have turned to compliance consultants to supplement staffing shortages and technology functions while they work to hire more staff.”[41] The message is clear. The weight of the Commission’s regulatory agenda is testing firms’ ability to bear the load.

Conclusion

Immense time and resources would be needed to address even a portion of the changes introduced by the Commission in the past two years. Firms are left scrambling to keep pace and compliance professionals are bearing a significant portion of the burden.

The one silver lining is that everyone in this room is more valuable than ever to their firms. However, compliance professionals might be justifiably concerned that they will be blamed for any imperfections in the implementation of all of these new rules. Hopefully, my colleagues at the Commission will recognize the immense task that has been placed before you. CCO liability should be evaluated through a framework that appropriately recognizes the efforts of individuals acting in good faith. The Commission’s enforcement authority should not be used as an opportunity for ‘gotcha’ or to be an easy way to boost enforcement statistics. In light of this wave of rulemaking, the Commission and its staff should recognize that honest, earnest, and dedicated compliance professions can be one of our most useful allies in protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

Thank you.