Report Highlights Challenges, Impact of Regulations on Small Funds and Advisers

The SEC’s Asset Management Advisory Committee’s Subcommittee on Small Advisers and Small Funds conducted a study on how evolving industry market structures and regulatory priorities have impacted the economics and operations of small advisers and funds. The resulting report identified areas where agency study, refined policy positions, guidance, and/or regulatory action(s) by the SEC or its staff may further advance fair competition and growth of small and diverse businesses in the asset management industry, while also supporting core investor protections. Among the regulatory challenges facing small advisers, according to the report: 

• Outsourcing: The report stated that an outsourcing shift is occurring simultaneously with a loss of leverage over vendors. For example, outsourcing of “full economy” or “full operational chain” support is moving from a “choice” and closer to a mandate in the context of business judgment of small adviser/fund boards and executive teams. Additionally, multiple series trust products (for funds) and outsourcing of full-chain middle- and back-office services for advisers is increasingly perceived as necessary to meet governance, operational, data management, and compliance demands.
• Cybersecurity and Insurance: Small advisers and small funds face increasing cybersecurity costs and increasing expenses related to disaster recovery and business continuity tools. Meanwhile, the insurance industry is hardening for small firms as cyber and data security products provide little real protections for advisers/funds or their clients.
• Regulation: The report pointed to “governance confusion” regarding the Liquidity Rule and Derivatives Risk Management rule. “Governance confusion persists regarding the appropriate delineation of responsibilities between/among the fund board, the fund’s adviser, and the derivatives risk manager, as well as how these responsibilities relate to similar responsibilities under the liquidity risk management program,” the report stated.

The AMAC recommended that the Commission or Staff issue further guidance in this area that merges an “activity-based” approach with a “risk based” and “resource-based” approach.