MFA Submits Comment Letters to the SEC on Beneficial Ownership Reporting, Cyber Risk Management, and Shortening the Settlement Cycle

 

April 12, 2022

Bryan Corbett: “The SEC’s proposed rule on beneficial ownership reporting tips the balance in favor of corporations at the expense of active investors and their beneficiaries, including pensions, foundations, and endowments.”

WASHINGTON, DC – Managed Funds Association (MFA), the trade association for the hedge fund and global alternative investment industry, today submitted three comment letters to the Securities and Exchange Commission (SEC) in response to proposed rules on beneficial ownership reporting, cybersecurity risk management, and shortening the settlement cycle to T+1. MFA emphasized significant concerns with the beneficial ownership reporting proposal.

“The SEC’s proposed rule on beneficial ownership reporting tips the balance in favor of corporations at the expense of active investors and their beneficiaries, including pensions, foundations, and endowments,” said MFA President and CEO Bryan Corbett. “This makes it more difficult for managers to seek positive changes at companies and hold corporate management accountable. This rule is one of many recent rulemakings from the SEC attacking active management strategies.”

Further detail about the three comment letters is included below.

SEC Proposed Rule on Beneficial Ownership Reporting

The SEC’s proposal would shorten the filing deadline from 10 days to 5 days for 13D filings, significantly broaden the circumstances under which two or more investors may be considered a “group,” and expand the definition of “beneficial ownership” to include certain cash-settled derivative securities.

In the letter, MFA stresses that the Commission’s proposed rule will harm activist investors’ ability to hold corporate management accountable. From the letter:

“If adopted in their current form, the Commission’s proposed changes would hobble the free flow of information through the market by impeding ordinary, day-to-day communications between investors, including communications relating to corporate performance and operations. They would also impair investors’ ability to engage with issuers and will ultimately harm companies, along with their shareholders and other stakeholders.”

MFA highlights that the unintended consequences of shortening the filing deadline for Schedule 13Ds and 13Gs outweigh any benefits. From the letter:

“Similarly, the Commission justifies its severe constriction of the Schedule 13D and 13G filing timelines with a generic desire for more timely and frequent disclosure, without meaningful consideration of the costs of its proposals, or any penetrating cost-benefit analysis that would justify these additional burdens on investors and the market.” 

MFA also emphasizes that the Commission’s proposed change to the definition of “group” will chill investor communications and undermine investor engagement crucial to the market. From the letter:

“This radical expansion of the group concept threatens to chill the free flow of ordinary, day-to-day communications between investors, undermining decades of work by engaged investors to improve corporate governance and performance and address key policy issues…” 

MFA recommends the Commission reconsider the proposal to expand beneficial ownership to include cash-settled derivatives. From the letter:

If engaged investors are unable to take advantage of the strictly economic opportunity derivatives provide without risking subjecting themselves to additional disclosure requirements, the investor may not be able to justify the expense of the in-depth research needed to support their investment thesis. This would discourage engaged investment strategies and the associated in-depth research, ultimately harming investors and the markets. Such a result would largely serve the interests of entrenched or indifferent corporate managers to the detriment of their shareholders.”

MFA’s full comments to the SEC’s proposed rule on beneficial ownership reporting can be found here.

SEC Proposed Rule on Cybersecurity Risk Management 

The SEC’s proposed rule would require investment advisers to adopt and implement written policies and procedures to address cybersecurity risks, report significant cybersecurity incidents to the SEC, and provide clients and investors with disclosure related to cybersecurity risks and incidents.

MFA supports the SEC’s objective of promoting cybersecurity risk management for investment advisers but calls on the SEC to avoid overly prescriptive requirements. From the letter:

“We are concerned that overly prescriptive requirements, or rules that would require advisers to devote resources to address low-likelihood events or address risks that are unlikely to result in actual harm to the adviser’s business or clients, could have the unintended consequence of increasing cybersecurity risks across the system, contrary to the Commission’s objectives.”

MFA also emphasizes that the costs associated with certain aspects of the Proposed Rules will impose significant barriers to entry for investment advisers. From the letter:

“Moreover, the costs imposed by certain aspects of the Proposed Rules will create significant barriers to entry for new advisers, thereby limiting investor choices and potentially negatively impacting other efforts by the Commission and President Biden’s administration to promote greater diversity within the asset management industry.”

MFA’s full comments to the SEC’s proposal on cybersecurity risk management can be found here.

SEC Proposed Rule to Shorten the Settlement Cycle to T+1

The SEC’s proposed rule would shorten the securities transaction settlement date for broker-dealers from two business days after the trade date (T+2) to one business day (T+1).

MFA supports the Commission’s proposal, which is consistent with MFA’s recently released market structure recommendations. From the letter:

“MFA concurs that shortening the securities transaction settlement cycle would provide substantial benefits to market participants by decreasing operational, systemic, credit, liquidity, and counterparty exposure risk.” 

MFA also calls on the SEC to survey market participants to evaluate potential issues ahead of a transition to T+0. From the letter:

The Commission should actively engage with market participants throughout the transition to T+1 so that the Commission and market participants may anticipate potential foot faults in a prospective transition to T+0. “

MFA’s full comments to the SEC’s proposal to shorten the settlement cycle to T+1 can be found here.

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About the Global Hedge Fund and Alternative Investment Industry

The global hedge fund and alternative investment industry, including hedge funds, credit, managed futures, and hybrid funds that invest in private companies, has assets under management of $4.3 trillion (Q2 2021). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.

About the Managed Funds Association

Managed Funds Association (MFA) represents the global hedge fund and alternative investment industry and its investors by advocating for regulatory, tax, and other public policies that foster efficient, transparent, and fair capital markets. MFA’s more than 150 member firms collectively manage nearly $1.6 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time. MFA has a global presence and is active in Washington, London, Brussels, and Asia. www.managedfunds.org