A Review of My 2020 Predictions
A Review of My 2020 Predictions
Every year, I offer my predictions on what will happen in the upcoming year for the investment management regulatory world. (I will soon publish my 2021 predictions.) Last year, the pandemic changed life as we know it and made predicting more difficult than usual. Yet, while it may seem little happened during the quarantine, much actually did happen from the home offices of industry players and the regulators. And, despite the pandemic, my predictive sixth sense apparently was working overtime (although I certainly did not predict the pandemic). As described below, for 2020, I went a surprising 6-2-2 (ties for predictions that were mostly correct). In 2019, I went 4-4-2. Over the last 5 years, I have gone 26-17-7 (8-2 in 2018, 4-6 in 2017, 4-3-3 in 2016). Below are the predictions I made in early January and how they turned out:
A Review of My 2020 Predictions
Lawsuits will delay implementation of Regulation Best Interest. Wrong. In June, the Second Circuit upheld Regulation Best Interest, and the SEC plowed ahead with implementation including several FAQs. (0-1)
Congress will propose/adopt legislation increasing SEC penalties. Right. The comprehensive defense bill included an expansion to 10 years of the SEC disgorgement period from the previous 5-year limitations period in the Kokesh case. (1-1)
New SEC rules will expand the closed-end fund market. Right. In April, the SEC adopted streamlined registration rules to allow BDCs and closed-end funds to utilize shelf registrations similar to operating companies. In August, the SEC expanded the “accredited investor” definition. (2-1)
The SEC will attack zombie funds. Wrong. The SEC brought cases against private funds for performance fee miscalculations, insider transactions, and unlawful cross-trading. The regulator also highlighted common private fund compliance deficiencies. However, the SEC did not bring any significant cases alleging that a private fund locked up investor redemptions to take fees without making new investments. (2-2).
The SEC will bring significant valuation cases against private equity firms. Right. In one case, a private equity sponsor agreed to pay over $1.2 Million for charging management fees based on over-valued portfolio securities. In another significant case, the SEC fined and barred a Chief Operating Officer for providing non-conforming asset valuation information. A Chief Compliance Officer was charged with aiding and abetting his firm’s valuation inflation. (3-2)
OCIE will conduct an adviser advertising sweep. Tie. The SEC did indeed adopt a new investment adviser marketing and advertising rule (206(4)-1) that eliminates distinctions between retail and institutional performance marketing, requires both gross and net performance, and mandates mutual fund-like one, five and ten year results. Although OCIE announced that it would be reviewing advertising (and other compliance practices) at multi-office firms, it did not announce a broad advertising sweep related to the new rule. (3-2-1)
Dual registrants will face a series of reverse churning cases. Tie. A large dual registrant agreed to pay over $18 Million in disgorgement, interest, and penalties for reverse churning and other violations in its wrap fee programs. The SEC faulted the firm for weak suitability procedures and supervision that harmed 1,401 clients who paid higher fees than a traditional brokerage account. A class action was commenced against another large dual registrant for directing clients to higher-cost fee-based accounts. When it came to dual registrants, the SEC also continued to focus on revenue sharing and disclosure. However, there really weren’t a series of reverse churning cases. (3-2-2)
The SEC will allow the use of distributed ledger technology for securities settlement and shareholder transactions. Right. The SEC adopted a 5-year safe harbor to allow special purpose broker-dealers to maintain custody of digital asset securities that utilize distributed ledger or blockchain technology, protecting them under the customer protection rule. This will facilitate the use of distributed ledger technology for a variety of securities transactions. (4-2-2)
The Enforcement Division will commence several cases against registered funds alleging inadequate fund compliance programs. Right. A large mutual fund manager reimbursed investors and was fined for exceeding the fund-of-funds investing limitations and for failing to implement a pre-trade screening process. A mutual fund manager agreed to pay over $500,000 for over-valuing odd-lot mortgage bonds and inflating the fund’s NAV. Another manager agreed to pay over $10 Million to settle charges that it did not observe its own risk management practices, which ultimately resulted in the fund losing 20% of its value. (5-2-2)
There will be a dramatic increase in the launch of niche ETFs. Right. The adoption of the ETF rule did indeed lead to an increase in fund launches. The new issue market included actively managed ETFs, ESG funds, risk management funds, and thematic funds. (6-2-2)