In The Know: Spotlighting the Dodd-Frank Act, Financial CHOICE Act, and the SEC Modernization Rules

AxiomSL | Broker Dealers

September 12, 2017

As a world leader in regulatory and risk reporting to financial institutions, AxiomSL is often asked to clarify regulatory and compliance issues sometimes too opaque to be clearly understood.

That’s the situation in which many asset management companies have found themselves related to the regulatory uncertainty clouding the U.S. investment industry.

As a complimentary service, we are issuing a series of “In the Know” primers to help explain in the plainest possible language what you need to know to successfully navigate this often-confusing environment. We hope you find this beneficial.

This “In the Know” spotlights the Dodd-Frank Act, Financial CHOICE Act, and the SEC Modernization Rules.

What We Understand

New chairmen have been appointed to the SEC and CFTC, and they have recently disclosed their agendas for their five-year terms. The touchstone of their shared mandate is to protect investors, maintain orderly markets and facilitate capital formation. Expect a review and possible revision of every rule enacted by the prior administration, an increase in targeted enforcement, and enhanced coordination of regulatory agencies in the pursuit of common regulatory mandates, including cybercrime, money laundering, bid-rigging and insider trading.

In the Spotlight

Dodd-Frank Act
Largely finalized and implemented, this Act is under scrutiny for substantial amendment by Congress. Sections of Title VII, regulating the OTC derivatives business, remains to be agreed upon and finalized between the SEC and CFTC.

How this Could Impact You

  • Title IV Reporting (Form PF) by private equity fund advisors has been proposed to be eliminated.
  • Section 619 Repeal. The Volcker Rule is likely to undergo a substantial revision. The FSOC has indicated they plan to draft revisions by year-end 2017.
  • Title IX Reform. The SEC and the DOL are working jointly to revise the Fiduciary Rule.

Financial CHOICE Act
Passed by the House and under review by the Senate, this legislation seeks to substantially rewrite the existing Dodd Frank Financial Services and Consumer Protection Act of 2010.

How this Could Impact You

  • Requires that the SEC incorporate economic analysis in its deliberations and enforcement matters. It also seeks to employ these tools to strike the right balance between deterrence and discipline for securities fraud and protecting shareholders from the crimes of rogue corporate officers and employees.
  • This proposal, coupled with the expansion of Artificial Intelligence and access to ‘big data’ methods by the SEC examination teams, will undoubtedly result in more targeted enforcement.
  • There is a host of initiatives designed to foster competitive markets, encourage innovation and expansion of investment opportunities for small, private and start-up companies.

SEC Modernization Rules
Adopted in October 2016 with the intent to modernize and increase the transparency of investment company reporting to better monitor and assess risk at a fund-specific level, manage counterparty risk, reduce liquidity risk and generally reduce systemic risk in the fund industry.

How this Could Impact You

  • There is a requirement to prepare new monthly disclosure Forms N-PORT (Portfolio) and annual filing of Form N-CEN (Census) with the largest funds commencing compliance mid-2018. Current reports, including forms N-Q and N-SAR, are being retired as part of the implementation of these new reports. Failure to comply with requirements to maintain minimum high-quality asset compositions in portfolios, or the excessive investment in illiquid assets, will require that funds self-report these exceptions on the new Form N-Liquid.

How to Remain Compliant

  • Firm’s Chief Data Officer and IT change team to focus on data architecture, sources, vendors and security.  Enforce environment, access and testing discipline when changing process, workflow, and reports.  
  • Training of staff involved in the reporting process to a level of proficiency with the reporting requirements, rules and submission constructs to conduct audit review of output from reporting processes.
  • Enable the escalation of errors and omissions within the reporting entity for approval, disclosure and correction.
  • Tone at the top for compliance should be set by senior management at each company.

For further information, contact Bruce Runciman, 212 248 4188 x 120 or brunciman@axiomsl.com