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Regulation and Compliance > Federal Regulation > SEC

GOP Lawmakers Blast SEC's Gensler Over 'Unreasonably Short' Comment Periods

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What You Need to Know

  • Short public comment periods limit outside input on rulemakings, the lawmakers said.
  • The money market fund plan needs at least a 90-day comment period, they told Gensler.
  • Plus, a recent study finds private equity–backed RIAs had a 200% jump in the average number of misconduct incidents after the ownership change.

Republican lawmakers blasted Securities and Exchange Commission Gary Gensler in early January for what they argue are “unreasonably short comment periods” on the rules Gensler plans to tackle this year.

Patrick McHenry, R-N.C., the top Republican on the House Financial Services Committee, and Pat Toomey, R-Pa., the top Republican on the Senate Banking Committee, voiced their concerns to Gensler in a recent letter on what they say are short comment periods on, for instance, the money market fund and proxy voting proposals.

Short public comment periods “limit outside input on rulemakings,” the GOP lawmakers argue.

“We are concerned that the Securities and Exchange Commission rulemakings under your tenure have consistently provided unreasonably short comment periods, which will harm the quality of public comment and may run afoul of the Administrative Procedure Act,” Toomey and McHenry wrote.

“The SEC should remedy this disturbing and unprecedented pattern — which contradicts executive orders from both Democratic and Republican administrations meant to encourage deliberative rulemakings — by extending the comment period of all proposed rulemakings that have been released during your time at the SEC.”

President Barack Obama’s White House, the two wrote, “appropriately recognized that public comment periods on most rulemakings should be at least 60 days. Extended comment periods, for example, for 90 days or 120 days, are also appropriate when taking up particularly complex rulemakings or when numerous rulemakings are simultaneously outstanding.”

The Administrative Conference of the United States, an independent federal agency within the executive branch charged with recommending improvements to administrative process and procedure, “similarly endorses a comment period of at least 60 days for significant regulatory actions,” the two explain.

“Despite these recommended practices, the majority of SEC proposals put forward under your chairmanship have thus far allowed less than 60 days for public comment,” they said.

“Two proposals provide 60-day comment periods, three proposals provide 45-day comment periods, and six proposals provide 30-day comment periods,” with some coinciding with federal holidays.

The money market fund reform proposal, issued in December, provides a 60-day comment period, which “is still an insufficient amount of time for such significant revisions to money market fund rules,” McHenry and Toomey said. They urged Gensler to extend the comment period on the money market fund rule revisions to at least 90 days, consistent with “the process for the most recent prior significant substantive revisions to the money market fund rule.”

In proposing the money market fund rule change, the SEC noted that in March 2020, “growing economic concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities.”

Prime and tax-exempt money market funds, particularly institutional funds, “experienced large outflows, which contributed to stress on short-term funding markets,” the agency said, adding that its proposed amendments are designed, in part, to address concerns about prime and tax-exempt money market funds highlighted by these events.

Gensler said that the plan is designed “to reduce the likelihood of runs on money market funds during periods of stress. They also would equip funds to better meet large redemptions, addressing concerns about redemption costs and liquidity. Given the broad reach of short-term funding markets, these proposals speak to our remit to maintain fair, orderly, and efficient markets.”

The proposed amendments would increase liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions.

The plan  would also remove provisions in the current rule permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund’s liquidity drops below an identified threshold. “These provisions appeared to contribute to investors’ incentives to redeem in March 2020 as some funds’ reported liquidity levels declined,” the agency stated.

To address concerns about redemption costs and liquidity, the proposal would require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures that would require redeeming investors, under certain circumstances, to bear the liquidity costs of their redemptions.

Private Fund Competition

Gensler told CNBC’s “Squawk Box” on Monday that the agency plans to “take up again a project around driving greater competition and efficiency in the private fund space,” with the SEC proposing “some rules to drive more transparency and competition.”

In the new year, the SEC is also considering proposing amendments to Form PF, the form on which advisors to private funds report certain information about private funds to the commission.

Private Equity and Advisor Misconduct

A recently released study found that private equity–backed RIAs had a 147% increase in the percentage of their advisors committing misconduct and 200% increase in the average number of misconduct incidents after the ownership change.

The research released by the University of Oregon examined whether ownership by private equity firms encourages or deters financial misconduct.

The authors analyzed the records of individual advisors around buyouts of investment advisory firms by private equity.

“Our estimates suggest that private equity ownership leads to an increase of 147% in the percentage of the acquired firm’s financial advisers committing misconduct,” the study states.

“While the misconduct rate of the acquired firms is only about 40% of the industry average before the buyout, it becomes on par with the industry average after the buyout,” the study explains.

The increase in misconduct “is stronger in firms with higher post-buyout growth in assets under management per adviser and is concentrated in firms whose clients include retail customers,” the report states. “Our results suggest a tension between advisory firms’ profit motive and ethical business practices, especially when customers are financially unsophisticated.”

The authors note that PE firms have also “shown a keen interest in the financial advisory business in recent years.”

According to research by the M&A consultant DeVoe & Co,, PE firms participated in 5% of all registered investment advisory firm merger transactions from 2013 to 2019 and accounted for 26% of the deals as measured by assets under management, the report states.


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