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Regulatory Update: September 2020


By Barrie C. Ingman  |  September 9, 2020

Each month, FactSet's Regulatory team offers a rundown of the most important developments in compliance and regulatory news. Read on to see which stories dominated the conversation last month.


UK and U.S. Adopt Polar Opposite Sustainability Policies for Pension Funds

On August 26, 2020, the UK Department for Work and Pensions launched a formal consultation on proposals to integrate environmental sustainability into the pension fund investment process.

The proposals, which would apply to large occupational pension schemes, recommend the integration of climate-related governance, strategy and risk management measures, and metrics into the investment process from both an investment risk and opportunity perspective.

Under the proposals, in-scope funds would also be required to report on the outcomes of measures taken pursuant to these processes in their annual reports and accounts in line with the Task Force on Climate-Related Financial Disclosures’ recommendations. Investors would then be notified of the disclosures in their annual benefit statements.

The consultation also includes proposals for funds to calculate and disclose their carbon footprint and assess the sensitivity of their underlying assets and liabilities to different temperature scenarios, including Paris Agreement aligned targets.

These proposals signal that the UK is moving steadily towards a policy approach more closely aligns with that of the EU, but with a unique British twist: the UK is doing things its way.

The proposals also further entrench the policy gulf that has emerged across the Atlantic. The UK proposed a position as far as possible to that of the U.S. Department of Labor (DOL) in its June 2020 proposals, which seek to prohibit ERISA pension plan fiduciaries from subordinating pecuniary factors to ESG considerations. This policy position has been met with an unprecedented volume of largely negative responses, which have not deterred the DOL from doubling down on the issue by announcing at the end of August a proposed blanket prohibition on fiduciaries voting at company meetings on non-pecuniary (read “ESG”) issues.

The U.S. proposal to ban non-pecuniary voting by ERISA fiduciaries includes a 30-day comment period. The UK consultation closes on October 7, 2020.

United States

SEC Proposes Sweeping Changes to Open-End Fund Investor Disclosures

Following its Fund Investor Experience “Request for Comment” (RFC) in June 2018, on August 5, 2020, the U.S. Securities and Exchange Commission (SEC) published a sweeping set of proposals to reform open-end investment management company investor disclosures.

Intended to address issues highlighted in the RFC process, such as investor indifference and confusion, the SEC has proposed a new Rule 498B under the Securities Act of 1933 (’33 Act), as well as amendments to a series of long-familiar rules and forms under the ’33 Act, the Securities Exchange Act of 1934, and the Investment Company Act of 1940.

The proposed new approach would “feature concise and visually engaging shareholder reports that would highlight key information that is particularly important for retail investors to assess and monitor their fund investments.”

Principal components of the proposal include:

  1. Shareholder reports tailored to the needs of retail shareholders
  2. Availability of additional information on Form N-CSR and online
  3. Amendments to the scope of Rule 30e-3 to exclude funds registered on Form N-1A
  4. Tailoring required disclosures to the needs of new versus ongoing fund investors
  5. Improvements to the prospectus disclosure on fund fees and risks
  6. Fee and expense information in fund advertisements

Comments on the proposal are due 60 days after publication in the Federal Register. At 646 pages and with recommendations to amend a dozen or more familiar rules and forms, the proposals will undoubtedly be the subject of much comment and study.

SEC Expands Accredited Investor Definition, Prying Open U.S. Private Markets

On August 26, 2020, as planned and anticipated, the SEC adopted amendments to the “accredited investor” definition in Rule 501(a) of Regulation D of the Federal Code (pursuant to the Securities Act of 1933), which provides one of the principal tests for determining eligibility to invest in private capital markets. 

The definition now supplements those who meet the existing income and net worth tests with the following categories of investors who may also qualify:

  • Individuals who have obtained certain professional certifications, designations or credentials issued by an accredited educational institution as specified by the SEC, such as those of good standing with Series 7, Series 65, or Series 82 licenses
  • With respect to investments in a private fund, “knowledgeable employees” of the fund
  • Limited liability companies with $5 million in assets
  • SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs)
  • A new category of Native American tribes, governmental bodies, funds, and entities organized under the laws of foreign countries that own investments as defined in Rule 2a51-1(b) under the Investment Company Act of 1940 in excess of $5 million (and that was not formed for the specific purpose of investing in the securities offered)
  • “Family offices” with at least $5 million in assets under management and their “family clients,” as defined under the Investment Advisers Act of 1940.

The term “spousal equivalent” is also added to the definition, so that they may their assets maybe pooled with their partner when seeking to qualify as accredited investors.

The new rules also expand the definition of “qualified institutional buyer” (QIB) in Rule 144A (of the Securities Act of 1933) to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition.  The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.

The amendments and order become effective 60 days after publication in the Federal Register.

SEC Amends Regulation S-K Business, Legal Proceedings, and Risk Factors Disclosures

On August 26, 2020, the SEC announced that it had amended the business description, legal proceedings and risk factor disclosures registrants are required to make pursuant to (Items 101, 103, and 105 in) Regulation S-K to enable a more rationalized, streamlined, and tailored suite of disclosures that better reflect a registrant’s particular circumstances, while at the same time removing repetition and immaterial information, thereby improving their “readability.” The amendments also refine the principles-based approach of certain of the disclosures including in relation to the "material" risk factors in Item 105. The amendments will be effective 30 days after publication in the Federal Register. 

European union

EU Commences ESG Regime-Phase II, with Consultation on Corporate Governance Overhaul

The European Commission (EC) launched a formal public consultation on July 30, 2020, on improving the EU company law corporate governance regulatory framework as part of its development of a broader ESG regulatory regime.

The consultation proposes measures to ”enable companies to focus on long-term sustainable value creation rather than short-term benefits.“ Its stated aims are to better align the interests of companies, shareholders, managers, stakeholders, and society more generally and is explicitly designed to enable companies to better manage ”sustainability-related matters in their own operations and value chains as regards social and human rights, climate change, environment, etc.”

The consultation follows ESA reports on "Undue Short-Term Pressures on Corporations" from the financial services sector (see EIOPA ReportEBA Report, and ESMA Report) published at the end of last year and the February 2020 Study on Due Diligence Requirements through the Supply Chain.

The scope and ambition of the proposals suggest it could be a game-changing legislative initiative in terms of the way corporates and investment firms operate. However, the impact of the initiative will only be assessible once proposed regulatory texts are published.

The consultation closes on October 8, 2020. The EC will then seek to formally adopt the proposals from Q1 2021 should they decide to proceed.

EC Proposes MiFID II Liberalization and New NPE and Synthetic STS Securitizations

On April 28, 2020, the EC adopted a coronavirus Banking Recovery Package that proposed measures to stimulate lending to households and businesses (see the August 2020 EBA "Quick Fix" Guidance). Subsequently, on July 24, 2020, the EC issued a press release and accompanying web page announcing it had adopted a “capital markets recovery package” to better enable capital markets to support European businesses recovering from the pandemic by “targeted adjustments” to MiFID II, securitization rules, and the Prospectus Regulation.

The proposals target changes to capital market rules to encourage greater investment and ensure the rapid re-capitalization of companies, with further Capital Markets Union Action Plan proposals due for announcement in September 2020.

The MiFID II proposal, dubbed the MiFID II Quick Fix Directive, is essentially a ragtag collection of narrow, liberalizing tweaks on issues largely targeting professional investors and relating to issues such as costs and charges disclosures, portfolio fall reports, and suitability cost benefit analyses for product switching.

There is also a temporary suspension of RTS 27 reporting for execution venues, a very narrow exemption from product governance rules for corporate bonds with “make-whole clauses,” and liberalization of aspects of the commodity position limit regime “to help the development of euro-denominated energy markets—important for the international role of the euro,” which includes proposals to exclude all securitized derivatives from the regime.

In parallel, the EC opened a public consultation on proposals to liberalize unbundling rules for SME fixed-income instruments.

The broader package of measures also contains potentially game-changing amendments to the EU securitization regulatory regime “to facilitate the use of securitization in Europe's recovery by enabling banks to expand their lending and to free their balance sheets of non-performing exposures.”

Proposed measures include a new non-performing exposure (NPE) securitization regime, which includes a new definition of “NPE securitization” and rules on credit assessments, risk retention, and due diligence. There is also a proposal for new “simple, transparent, and standardized “on-balance-sheet” synthetic securitizations (in line with a May 6, 2020, EBA final report on the subject). Both measures include modifications to certain regulatory capital rules and there is also a proposal to modify the treatment of unfunded credit protection.

Finally, the EC is proposing several other primary capital markets and funding measures including a temporary short-form “EU Recovery Prospectus” for companies that have a track record in the public market; this would expedite the process of capital raising and draw equity investment to support the economy through the recovery and diminish credit pressures.

ESMA Proposes AIFMD Amendments That Touch on UCITS, MiFID II, and Brexit

On August 18, 2020, the European Securities and Markets Authority (ESMA), published a letter it had written to the EC highlighting areas it regarded as worthy of consideration during the upcoming statutory review of the Alternative Investment Fund Managers Directive (AIFMD).

Harmonization of the AIFMD and UCITS regime is a key theme in the letter which proposes numerous areas for [harmonization and] reform including risk management rules, regulatory reporting (including in relation to liquidity and leverage risks), rules governing the “significant influence” wielded by fund managers over the management body of a fund, the “availability of additional liquidity management tools” such as redemption suspensions, and rules to overcome fragmented cross-border supervision.

The letter also includes proposals to harmonize aspects of AIFMD, UCITS, and MiFID II to ensure a level playing field across the investment management landscape, following the emergence of inconsistencies between the two fund regimes and the (MiFID II) portfolio management regime, which have arisen through piecemeal modifications to the various legislative texts over time.

ESMA further proposes a wholesale overhaul of delegation arrangements for funds to, among other things, prevent regulatory arbitrage. Brexit looms large behind these specific proposals and if pushed through they could present an upheaval in the way investment management across the Continent (including the UK) currently operates.

Other recommendations include proposals for extensive additional reporting rules, definitional aspects of the legislation (including that of “semi-professional investors”), a proposal for a loan origination framework (including a dedicated authorization process for loan origination funds), a proposal for a standardized approach to reverse solicitation, and a recommendation that all funds and fund managers have a Legal Entity Identifier (LEI).

Additional proposals touch on depositaries, remuneration, the liability of external valuers in negligence, the proposed phase-out of paper communications, consideration of a depositary passport regime, and structural changes to AIFMD leverage measures.

In summary, ESMA is seeking to simplify, harmonize and rationalize investment management and funds regulation across the EU, enhance several aspects of the respective regimes, and prepare the way for defensive measures as part of the broader Brexit political battleground.

Proposal to Empower European Commission to Replace LIBOR Following its Cessation

On July 24, 2020, the EC announced proposals to amend the EU Benchmarks Regulation (BMR) “to ensure that when a widely used benchmark is phased out—as is now the case [with LIBOR]—it does not cause disruptions to the economy and harm financial stability in the EU.”

The press release notes that the BMR does not adequately cover how to deal with the cessation of a critical benchmark such as LIBOR and that in the present instance, some LIBOR contracts will not be renegotiated before the cessation of the rate occurs.

As such, the EC is proposing that it be given new powers to replace LIBOR (or a similar benchmark should another LIBOR-like eventuality emerge) with another benchmark “where necessary to avoid disruption of the EU’s financial markets.”

The proposed statutory replacement rate would only apply to financial contracts that reference LIBOR at the time of cessation. As the statutory replacement will be a matter of law, contractual conflicts should not arise. Nevertheless, the EC is still strongly urging market participants to agree on a permanent replacement rate for all new contracts whenever possible.

Finally, the proposals also recommend modifying the BMR to enable the continued use of certain currency benchmark rates administered outside of the EU (after the end of the BMR transitional period for third-country benchmarks) so that EU companies can continue to adequately hedge their FX risk in export and foreign investment activities.

United kingdom

UK Seeks to Tighten Financial Promotions Regulation

On July 20, 2020, HM Treasury published a consultation paper on proposals to amend the UK’s financial promotions regime by limiting the ability of authorized firms to approve the financial promotions of unauthorized firms unless they have first passed through a “regulatory gateway” by obtaining FCA permission to do so. There are two proposed mechanisms to achieve this arrangement: a modification of FCA rules or by making “approval of financial promotions” a regulated activity under Regulated Activities Order (with the latter the Treasury’s preferred option).

On the same day as the above consultation, HM Treasury also published a consultation paper on bringing unregulated crypto-assets within the scope of the financial promotions regime.

Responses to both consultations must be submitted by the end of day, October 25, 2020.


AMF Modifies Application of ESG Promotional Rules

On July 28, 2020, the French financial markets regulatory authority, the AMF, published an update of its Position-Recommendation 2020-03 (updated PR), initially published on March 11, 2020, aimed at ensuring non-financial criteria used in an investment product mirrors that disclosed in concomitant investor communications. The updated PR has the following components:

  • In order to prevent greenwashing, there is a requirement to ensure the adequacy of the investor communication in relation to the non-financial criteria presented versus the actual approach taken by the investment manager
  • The position recommendation initially proposed a binary distinction between a fund that adopted a significantly engaged approach to non-financial criteria—which would permit it to make the criteria a key aspect of marketing communication—and a fund that adopted an approach that did not meet these minimum requirements, meaning it could only promote with a "very brief and very proportionate" reference of these non-financial considerations in marketing materials. The position recommendation now introduces more nuance with the possibility of a "reduced" communication for funds that take non-financial criteria into consideration in their management strategy but without adopting a significantly engaged approach. The AMF website table  summarizes the various levels of communication before and after the update.
  • The PR clarifies the key communication on the consideration of non-financial criteria for certain approaches to non-financial indicators
  • The new revision includes two additional recommendations relating to policies for managing controversies and shareholder engagement

This position applies to all French AIFs and UCITS, as well as non-French UCITS that are authorized to be marketed to French retail investors. Application will depend on location, and whether they are new or existing funds, with the rules applying immediately for newly created funds.

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Barrie C. Ingman

Regulatory Advisor




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