Federal agencies such as the Securities and Exchanges Commission (SEC) are now moving from their planning phase into an execution phase. Consequently, new regulations are on the way that will impact investment management in 2022.
The world and how we interact in it have both changed. Regulators are quickly adapting to changes in environmental issues, new technology, and society. If you work in investment management, read this article and prepare for the future.
The Investment Industry And DEI
According to the CFA Institute, Diversity, Equity, and Inclusion (DEI) is critical to the future of the investment management industry. An inclusive working environment gives equitable access to resources and opportunities. Everybody can benefit.
Additionally, a company with an inclusive culture can leverage diverse views. The organization can work together for the good of all stakeholders. This type of culture is vital to the success of the business.
Inclusion Makes A Clear Difference
A 2019 study by McKinsey shows inclusion does make a difference overall. Companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability compared to the fourth quartile.
However, the investment management industry is still lagging. It struggles in all areas, such as low gender and racial diversity levels and low female-owned and minority-owned investment firms.
Latest Regulations For DEI
Regulations came through last year to try and counter these problems. Here are some of the latest steps to try and boost DEI:-
- Several bills in Congress to increase diversity on corporate boards. For example, H.R. 1277 Improving Corporate Governance Through Diversity Act of 2021
- In June 2021, the SEC said it had plans to finalize new disclosures on board diversity as part of its rulemaking agenda.
- New state rules, such as SB 826 and AB 979, were brought in, which require minimum gender and race diversity levels.
Financial Inclusion
Another critical area to consider is financial inclusion. It is the process of providing financial services to underserved and unserved individuals and businesses. However, many companies overlook this area.
These services must be affordable, ethical, and sustainable so that everybody can access economic growth. An example could be providing saving mechanisms for education or health care.
Financial Inclusion Regulation
Regulators are increasing their activity and scrutiny of financial inclusion. At the same time, asset management companies and boards are trying their hardest. However, much still needs to be done in this area.
Two areas that have helped are:-
- Disclosure requirements like “comply or disclose”
- The Asset Management Advisory Committee (AMAC) Report and Recommendations on Diversity and Inclusion in the Asset Management Industry
Engage With Underinvested Communities
Future regulations will come. However, in the meantime, businesses in the investment management sector can do more. For example, to reach out to their local underinvested communities and educate them on economic development.
Regulatory Changes For Digital Assets In Investment Management
The crypto space has had positive and negative news in the last few years. Some people praise digital currency as the future for all. In contrast, others prefer more traditional forms of money.
In the current economic environment, it is hard to know for sure what will happen in the future. However, one thing is sure, new laws and regulations will come into play for digital assets.
Strict Regulations For Digital Assets
Federal regulators have hinted that they will use the full extent of their powers to regulate digital assets. What that means remains to be seen, but it is undoubtedly imminent.
Two areas will be on regulators’ radar; the first is the regulated financial instruments, such as securities. The second one is regulated entities, such as banks. The aim is to clarify banks’ roles and requirements for digital assets.
The PWG Stablecoin Report
The President’s Working Group (PWG) stablecoin report in November 2021 details the federal regulator’s vision of the crypto industry. The report suggested several things:
- Congress to enact legislation for a federal framework for stablecoin regulation
- Bank-like standards to be imposed on stablecoin issuers or entities that facilitate it
- If stablecoins are to be known as securities, then federal regulators should use existing authorities to control this area
What Regulatory Obligations Are Expected?
A statement from the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FDB), and Office of the Comptroller of the Currency (OCC) detailed their intentions. It was a clear message to banks that operate in the crypto space.
Areas that will come under scrutiny and may follow with obligations will be:
- The management of balance sheets
- Stablecoins
- The facilitation of purchase and sales
- Collateralized loans
- Custody
On top of all this, the SEC will finally judge whether a stablecoin should be known as a security. Once this is clear, the SEC might bring in continual enforcement actions. Organizations must be ready to deal with this possibility.
Environmental, Social, and Governance (ESG) Investing
ESG investing is hot right now. Investors are more interested in how companies use their capital. ESG investors want to know how asset management firms handle their environmental, social, and governance responsibilities.
PwC estimated that ESG mutual fund assets will grow at a compound annual growth rate (CAGR) of 8.5% between 2017 and 2025. This investor demand and evolving regulations are pushing asset managers to embed ESG in the investment process.
ESG investing Is An Opportunity For Asset Managers
With more investors moving towards ESG investing, it makes sense for asset managers to view it as an opportunity. Putting themselves in the shoes of ESG investors can help them refine their internal processes.
For example:-
- A company’s impact on the environment includes its carbon footprint and sustainability in its supply chain.
- The social impact of a company internally. Also how it conducts itself externally in the community and the wider world.
- Do the board and management govern themselves as positive leaders and interact correctly with different stakeholders.
Regulations For ESG Investing
Environmental, Social, and Governance (ESG) investing already has regulatory laws, but not that many so far. Consequently, with the increase in ESG investing, the signs indicate that more rules and regulations are coming.
The SEC and the US Department of Labor (DOL) are regulators in this area and have hinted that they have ESG on their schedule. The timeline is not clear at the moment, but asset managers should take ESG seriously.
It is the perfect time for investment managers to look at existing ESG products. A careful look at the investment process might highlight areas to improve before new regulations come. Additionally, they could look to add new ESG products.
Embedding ESG In The Investment Process
Hong Kong is a good example where regulators have publicly recognized the impact of ESG investment. The realization that ESG was crucial to maintaining its position as an international financial center in Asia.
When regulators enhance the regulatory regime to integrate ESG factors, these changes can directly affect business decisions for asset managers and businesses. Also, many countries are now creating specific ESG investment products.
Businesses are finally understanding the urgency to improve their business processes to comply with regulatory requirements. Indeed, companies could lose potential business opportunities if they don’t adapt to the current market and regulations.
Next Steps
It is not always possible to predict what the regulators will do in the next six months. However, it would be prudent to implement internal steps to handle new regulatory changes. It is a proactive process that could save you valuable time.
Organizations in the investment management industry need to monitor these three areas closely. At the very least, figure out how your business can deliver the best quality service to satisfy clients and regulators.