Birdthistle Speaks on SEC’s Regulatory Agenda, Priorities at PLI Conference

The SEC’s Director of the Division of Investment Management, William Birdthistle, delivered prepared remarks at a PLI program on current issues and trends on investment management. Birdthistle’s remarks touched on the SEC’s regulatory map, developments impacting the investment management community over the next few months, and a matter they are currently working on: money market funds. His speech also briefly mentioned the LIBOR transition and the impact MiFID II has on the market for investment research.

During his remarks on MiFID II, Birdthistle announced the Division of Investment Management would allow its October 26, 2017 no-action letter to SIFMA to expire. The no-action letter provides that the SEC would not recommend an enforcement action against a broker-dealer that accepted cash payments for research from an investment manager that was required by MiFID II to pay for research out of its own money (“hard dollars”) rather than client commissions (“soft dollars”). This shift raises questions about the possible investment adviser status of broker-dealers that, after the no-action letter’s expiration on July 3, 2023, accept “hard dollar” payments for research from investment managers subject to MiFID II in the EU.

In his comments, Birdthistle noted his focus remains in three key areas, fee arrangements, facilitation of capital formation, and proxy voting. Regarding fees, he noted the “focus on fees can take many forms, and—as I have noted before—our authorities under the Investment Company Act encompass not merely the form and content of disclosure, but also helping to ensure that advisers comply with their fiduciary obligations.” On proxy voting, Birdthistle commented that investors don’t always know how the funds they invest in vote on proxies, and that considering “the size of the $30-trillion fund industry, that absence of democratic participation is certainly a noteworthy phenomenon.” He further added that he views proxy voting as “one of the main areas where markets could aim for increased democratization.”

Birdthistle included money market funds in his remarks, noting that “these funds, together with a few others, have at times been called ‘shadow banks.’” While touching briefly on the 2008 Crisis and ‘breaking the buck” he focused most of his comments on March 2020 market events, particularly the detrimental impact outflows from prime money market funds had on liquidity in the Treasury markets. He noted that making these funds into bank accounts has been rejected in the past and would lead to institutional investors turning to ultrashort bond funds rather than bank depository accounts. Instead, Birdthistle remarked the swing pricing “allows investors in a fund to leave whenever they wish but, in moments of tight liquidity, the departing shareholders must bear the higher costs of their exit.” He added that swing pricing may require “upgrades” but that “perhaps the world’s largest, most globally critical financial system ought to be more modern and robust."