New Law Reforming Dodd-Frank Affects Advisers and Funds
Now that the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) has been signed into law, what’s in it for investment advisers and investment companies? Not a lot, it turns out, but there are key measures that advisory firms and funds should be aware of.
The 73-page bill, which passed by House of Representatives in March and the Senate last month, was signed into law by President Donald Trump on May 24. Much of the legislation, which largely reforms parts of the Dodd-Frank Act, affects banks. Advisers and funds, however, may want to know more about the following provisions:
Immunity from civil liability for investment advisers, banks and broker-dealers, including their employees, who report suspected elder financial abuse to the government;
Changes to the designation of non-bank systemically important financial institutions (SIFIs) and related stress tests;
Whether restrictions will apply to advisers or asset managers affiliated with certain types of banks that may be subject to the Volcker Rule; and
Creation of a new type of private fund.
"We applaud this bipartisan action to make commonsense reforms that will allow financial institutions to better serve their customers," said Investment Company Institute president and chief executive officer Paul Schott Stevens.
The legislation incorporated a number of previously-introduced pieces of legislation that sought to make changes to Dodd-Frank or that otherwise were seen as encouraging economic growth. Among them was the Senior$afe Act, which provides the civil liability immunity. "This will lead to greater protection for a particularly vulnerable segment of U.S. investors," said Investment Adviser Association president and CEO Karen Barr, who said that the IAA "applauds" Congress’ inclusion of the Act in the final bill.
Mayer Brown partner Adam Kanter described these modifications as "welcome changes for bank-affiliated advisers. They clean up some of the affiliate red tape. Nothing here has the impact on advisers as the original Dodd-Frank Act, though. This is more in the way of tinkering."
Immunity for reporting financial elder abuse
Immunity from civil liability for advisers, banks and broker-dealers, as well as their employees, who report suspected elder financial abuse to government authorities, comes with the caveat that those employees must receive proper training from the employer on identifying such abuse, said IAA vice president for government affairs Neil Simon. "The safe harbor protects them from a civil suit by someone who might be accused of financial abuse, is found not guilty, and then files a suit against the person who accused them."
SIFIs and stress tests
A SIFI designation, which was created in the wake of the 2008 financial crisis, basically applies a label of "too big to fail" on certain non-banking companies and on banks. Those institutions so designated are then subject to additional "prudential" regulations – and, as a result, both the concept and the use of SIFIs have been subject to criticism.
The new law goes part of the way to addressing critics’ concerns by increasing the financial threshold for applying prudential standards to bank holding companies from $50 billion in total consolidated assets to $250 billion. "It also mandates that the Federal Reserve, on its own or pursuant to a recommendation by the Financial Stability Oversight Counsel (FSOC), consider a variety of risk-related factors in applying prudential standards to nonbank [emphasis IAA] SIFIs – which could include investment advisers," the IAA said.
As far as stress tests are concerned, the new law clears up some uncertainty about the frequency of the Dodd-Frank Act’s stress-testing requirements that non-bank SIFIs must conduct on themselves. Such tests must now be "periodic," according to the IAA. The Federal Reserve must still conduct annual tests of these institutions, however.
The above aside, "no investment adviser has as of yet been designated as a SIFI," Simon said.
Advisers and the Volcker Rule
The so-called "Volcker Rule," in reference to former Federal Reserve chairman Paul Volcker, refers to Section 619 of the Dodd-Frank Act. In general, the Rule prohibits banks from conducting certain investment activities with their own accounts, and limits their dealings with hedge funds and private equity funds.
"The new law did not get rid of the prohibition entirely," said Simon, but modifies it in two ways. First, it excludes community banks with less than $10 million in total consolidated assets and with insubstantial trading assets and liabilities. "This means that an adviser or asset manager affiliated with an excluded bank also will not be considered to be a ‘banking entity’ under the Rule and will thus not be subject to its restrictions," the IAA said.
The second modification in the law is that it changes the Volcker Rule’s name-sharing prohibition for covered funds to allow name sharing with an adviser to a covered fund – but only if the adviser’s name is not the same as, or a variation of, the name of an affiliated bank or holding company.
New private fund
The new law creates a new type of private fund under Section 3(c)(1) of the Investment Company Act. Up to 250 investors would be permitted to invest in a venture capital fund, with not more than $10 million in aggregate capital contributions and uncalled committed capital.
By opening investing up to 250 persons, this amendment "will provide benefits to smaller venture capital funds and investors," Simon said.