Reference on Select Policy Issues

ESG

United States: Through speeches, op-eds, meetings with policymakers, and a comprehensive letter to the Securities and Exchange Commission (SEC), ICI advocated for public companies giving fund managers clear, consistent, and reliable ESG data. ICI’s letter urged the Commission to mandate certain emissions and workforce data, while emphasizing the need to have a corporate ESG disclosure framework that is flexible and rooted in financial materiality.

Europe: As European regulators moved quickly to develop detailed requirements under the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, ICI worked diligently to support member implementation efforts through a series of member workshops. ICI also engaged with national regulators and the European Supervisory Authorities (ESAs) to help members with this challenging process. Separately, ICI Global responded to an ESA consultation that amends the draft regulatory technical standards (RTS) under the SFDR to add additional disclosures required by the Taxonomy Regulation.

Hong Kong: ICI raised several concerns in a consultation response to climate risk requirements for asset managers from the Hong Kong Securities and Futures Commission (SFC). Among other positive adjustments, the SFC explicitly allowed asset managers to leverage group resources in complying with the requirements. The SFC also agreed with ICI’s advice to stay flexible in incorporating the recommendations of the TCFD, by avoiding automatically adopting any future iterations.

Singapore: The Monetary Authority of Singapore’s final guidelines on environmental risk management for asset managers incorporated many of ICI’s recommendations, including to strengthen its focus on materiality and provide flexibility in scenario analysis. In March 2021, ICI commented on the MAS’s on its proposed “green” taxonomy, raising concerns about the risk creating a conflicting taxonomy, countering regional and global efforts to harmonize taxonomies and a lack of widely available data from companies.

Global: In submissions to the International Financial Reporting Standards (IFRS) Foundation—which has been leading the effort to establish a common global baseline for corporate disclosure of sustainability information—ICI outlined forward-thinking, investor-centered recommendations for developing an International Sustainability Standards Board, including on the board’s focus, governance, and funding.

Earlier in the year, ICI’s Board of Governors unanimously called for companies to provide disclosure consistent with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and the standards of the Sustainability Accounting Standards Board (SASB). ICI also provided input on the TCFD’s consultation:

• advocating that an organization disclose the TCFD’s proposed climate-related metrics only if they are financially material to the organization; and
• urging the TCFD to conduct further analysis before including metrics beyond Scope 1 and 2 greenhouse gas emissions in the revised guidance.

Fund Regulation

Aggregation rule: In September 2020, the Federal Trade Commission (FTC) proposed an aggregation rule related to Hart-Scott-Rodino (HSR) premerger notification filing requirements. The rule would expand the scope of a “person” to determine whether HSR filing thresholds are met when the person acquires voting securities of an issuer company. A filer would be required to aggregate the holdings of an acquiring fund of that issuer with the holdings of all other funds under common management by an adviser, as well as the holdings of other associated entities.

ICI submitted a comment letter to the FTC asking it to abandon the proposed rule, arguing that the rule is fundamentally not administrable, would impose massive operational burdens, and would not benefit antitrust enforcement, among other reasons.

Alternative trading systems: In September 2020, the SEC proposed to eliminate the exemption from Regulation ATS for alternative trading systems (ATSs) that trade government securities or repos and reverse repos on government securities. The SEC also issued a concept release that requests comment on fixed-income electronic platforms that trade corporate debt and municipal securities. These releases reflect the SEC’s effort to attain greater consistency in how they regulate these types of trading venues.

ICI submitted a comment letter that supports the proposed rule, which would subject these ATSs to Regulation ATS and Regulation Systems Compliance and Integrity (Regulation SCI). This support is based on the fact that sophisticated electronic platforms and trading protocols have become a significant part of the US Treasury market. ICI also recommended that the Commission not impose Regulation ATS and the exchange framework on existing and emerging electronic trading protocols and functionalities for corporate debt and municipal securities that do not meet the SEC’s definition of an ATS or an exchange.

Closed-end funds: In May 2020, following receipt of a comprehensive ICI report with detailed data on closed-end fund “activists” and resulting shareholder harm, the SEC staff withdrew guidance limiting the ability of closed-end funds to defend themselves against activist investors seeking short-term profits. In withdrawing the guidance, the SEC staff requested feedback to determine whether additional action is warranted. In July 2020, the SEC staff also requested feedback on whether registered funds should have increased access to private market investments.

ICI responded to both requests in December 2020, fully supporting the SEC staff’s decision to withdraw its guidance and for closed-end funds, with strong investor protections, to provide retail investors with increased exposure to private market investments. Since then, the Institute has met with policymakers to highlight the benefits of closed-end funds and the challenges they face. Based on ICI’s work, Congress introduced bipartisan legislation in June 2021 that would further protect closed-end funds from activist investors and expand their ability to access the private markets.

Communicating with fund beneficial owners: Under current SEC rules, funds may only communicate directly with their registered shareholders and must rely on intermediaries to correspond with beneficial shareholders (those shareholders who purchased shares directly through a broker-dealer or other intermediary). SEC rules also require intermediaries to classify beneficial owners as either non-objecting beneficial owners (NOBOs) or objecting beneficial owners (OBOs). Funds are prohibited from contacting OBOs, which makes it difficult for funds to achieve quorum for proxy votes. In late 2019, SEC staff encouraged the formation of industry working groups to discuss and evaluate reforms to the US proxy system, including the OBO/NOBO system.

Throughout 2020 and 2021, ICI actively participated in the industry OBO/NOBO working group advocating for members’ views and reforms. In August 2021, the working group submitted its final report to the SEC staff. In that report, ICI highlighted the significant problems with the OBO/NOBO system and outlined how that system perpetuates the broken processing fee framework.

Derivatives: In October 2020, the SEC adopted a new rule reforming the regulation of US-registered funds’ use of derivatives, consolidating 40 years of guidance, no-action letters, and informal comments. The rule permits funds to use derivatives in more than a minimal amount if they implement a derivatives risk management program and adhere to risk-based leverage limits.

The final rule reflects a number of ICI’s recommendations over the course of the six years since the rulemaking was first introduced. ICI was particularly pleased with the SEC’s principles-based approach to the derivatives risk management program and its determination to increase the risk-based leverage limits from those proposed. On adopting the higher leverage limits, the SEC cited ICI data showing that lower thresholds would have severely affected funds and their shareholders. Since the new rule was adopted, ICI has been educating member firms, assisting with implementation challenges, and elevating appropriate issues of concern to the SEC staff.

Disclosure of investment policy: In late March 2021, the European Banking Authority (EBA) published a consultation paper on draft RTS on disclosure of investment policy by investment firms. The draft RTS are meant to gather disclosures designed to help stakeholders understand investment firms’ potential influence over the companies in which they have voting rights and the impact of investment firms’ policies on aspects such as the governance or management of those companies.

ICI’s July comment letter noted that the draft RTS represented a reasonable exercise of the EBA’s authority, while also recommending that the EBA modify some of the provisions to bring them into greater alignment with the mandate and the purpose of the regulation (e.g., ICI recommended that disclosure should not be duplicative and should relate to “indirect” holdings only where the investment firm directs the voting of those shares).

Disclosure reform: In August 2020, the SEC proposed major changes to fund disclosure. The proposal would: (1) allow funds to deliver a new streamlined shareholder report coupled with notices about material changes instead of annual prospectus updates; (2) rescind Rule 30e-3 for mutual funds and ETFs, which currently permits those funds to post shareholder reports online and mail shareholders a notice of where the reports are available; and (3) make other disclosure changes, including to the fund fee table and principal risks. The proposed streamlined shareholder report would be similar to one that ICI tested and recommended in 2018.

ICI submitted a letter in December 2020 voicing support for the proposal, including the streamlined shareholder report. But the Institute’s letter also expressed several concerns. The letter strongly recommended allowing mutual funds and ETFs to continue relying on Rule 30e-3. It also recommended greater flexibility on when funds must deliver notices of material changes and clarification to reduce potential liability stemming from changes to the disclosure framework. ICI has discussed these issues with the SEC and its staff and is continuing advocacy on this important rulemaking.

Electronic delivery: During the COVID-19 pandemic, the SEC recognized the need to make it easier for funds to take advantage of electronic delivery (e-delivery) capabilities. In November 2020, the SEC’s Asset Management Advisory Committee voted to recommend that the SEC permit firms to deliver documents to investors by e-delivery, subject to appropriate investor protections.

ICI strongly supports making e-delivery the default method for funds to communicate with their shareholders, with the ability to elect paper delivery at any time. In September 2020, we submitted a letter to the SEC highlighting the results of an ICI survey on members’ experience e-delivering documents to investors.

Fair Valuation

• Adoption of fair value rules: In December 2020, the SEC adopted new rules addressing the fair valuation responsibilities of funds and their boards and advisers. The SEC also rescinded prior SEC and staff guidance on fair valuation. The new rules and related guidance represented the SEC’s most comprehensive activity on fair valuation in 50 years.

ICI’s July comment letter generally supported the proposal, particularly its rescission of the prior patchwork of guidance; acknowledgment of the importance of accounting standards to funds’ valuation process; and recognition of the complementary and essential roles that investment advisers and fund boards play in valuing securities. We recommended changes to certain aspects of the proposal, and the final rules included less burdensome board reporting and recordkeeping requirements. ICI also has been, and will continue to be, active in helping members implement the new rules through webinars, conference panels, and committee calls.

• Cross trading guidance: The SEC also included cross trading guidance in the fair value rules’ adopting release, which will severely limit affiliated funds’ ability to cross trade (i.e., trade with one another) fixed-income securities beginning in September 2022. The SEC staff requested comment on funds’ cross trading practices in March 2021.

In April 2021, ICI submitted to the SEC a report focused on funds’ fixed-income cross trading activity. It included detailed results from a member survey, a summary of the quantitative benefits of cross trading (including transaction cost savings), and policy recommendations. ICI has engaged extensively with the SEC to explain the benefits of cross trading and the controls that funds impose around this activity.

National Market System (NMS) equity data plan governance: In June 2020, the three major equity exchange groups filed a petition for review to the US Court of Appeals for the DC Circuit to invalidate the SEC’s May 2020 NMS equity data plan governance order. This order requires the exchanges to submit a new NMS plan that would enhance the role of asset managers and other market participants in governing the public consolidated data feed. The order was intended to address conflicts of interest between the exchanges’ own commercial interests in providing market data and their regulatory obligation to operate the feed for the benefit of investors. During the litigation, the exchange groups continued to comply with the order and submitted a new plan—the CT Plan—for approval.

ICI filed an amicus brief in support of the SEC’s order, arguing that the exchanges’ conflicts of interest are real and that other market participants do not have their own conflicts of interest that should preclude their involvement in plan governance. ICI also submitted two comment letters to the SEC that recommended certain improvements to the proposed CT Plan that would enhance participation and input from actors other than self-regulatory organizations. The court dismissed the petition against the SEC’s order for technical reasons, but the exchange groups have filed another petition for review to invalidate the CT Plan.

Money market fund reform: In response to the March 2020 market volatility caused by COVID-19, a variety of policymakers issued reports on policy proposals to enhance money market fund resilience.

In filings with the President’s Working Group, the European Securities and Markets Authority, and the Financial Stability Board, ICI underscored that our data and analysis challenge the perception that money market funds caused stress in the short-term funding market in March 2020. We urged policymakers to consider these facts and advocated for targeted reform measures.

Processing fees: SEC rules require funds to reimburse intermediaries for reasonable expenses incurred in forwarding fund materials to beneficial owners of fund shares. Intermediaries generally outsource forwarding of fund materials to a vendor that charges the fund. The New York Stock Exchange (NYSE) fee schedule, which governs the amounts intermediaries and vendors charge funds, is ill-suited for the distribution of fund materials and its fees bear little relation to the actual work and cost of distributing materials. In December 2020, the NYSE proposed transferring oversight for the processing fee schedule to FINRA. In August 2021, SEC staff disapproved the NYSE’s proposal, and the exchange subsequently filed a petition for review of that decision.

ICI submitted two letters in response to the NYSE’s proposal, commenting in January and May 2021 that the SEC must take the lead to reform the broken processing fee framework, and meeting with SEC commissioners and staff to advocate for fund investors. Following the NYSE’s submission of the petition for review, ICI urged the Commission to grant the petition and reevaluate the processing fee framework in the interest of fund investors.

Governance

Director engagement: IDC formed a director engagement working group to consider innovative ways to enhance IDC’s outreach to the independent director community. The group focused on topics such as ways to enhance peer-to-peer sharing opportunities and increase participation in IDC’s activities, including by small fund directors. The working group helped shape a new program—the IDC Speakers Series—to bring insights to the independent director community on big ideas that are influencing the environment in which regulated funds and their boards operate.

Diversity and inclusion: IDC and its Diversity and Inclusion Working Group devoted extensive time and effort to help enhance diversity on fund boards through educational resources, opportunities for engagement and dialogue, and assistance to potential director candidates. As part of this effort, IDC joined with ICI to release the first publicly available results from their industrywide surveys on representation of women and minorities at all levels of asset management. The results of the IDC/ICI Directors Practices Study point toward the goal of greater representation of women and minorities in the boardroom, and indicate that recent trends are positive. The study involved 181 fund complexes reporting data on 235 fund boards, representing $23.4 trillion of assets under management.

Public Policy Initiatives

• Disclosure: In response to the SEC’s proposal to modernize the disclosure framework for open-end management investment companies, IDC expressed strong support for streamlined shareholder reports that would feature concise and visually engaging key information, and would enable retail investors to assess and monitor their fund investments. IDC also strongly encouraged the SEC to allow electronic delivery of disclosures to shareholders.
• In-person meeting requirement: Because of COVID-19, the SEC issued an exemptive order providing temporary relief from the in-person fund board meeting requirement until a date to be specified by the SEC—a date that would be no less than two weeks from the date of the notice. IDC submitted a letter to the SEC commending its prompt reaction to the pandemic, and requested that, once the pandemic has concluded, the SEC provide at least six months’ notice before permanently withdrawing the current temporary relief. IDC emphasized that this would provide greater certainty to the fund director community, noting the recent resurgence of COVID-19 and the fact that fund boards will require sufficient time to plan their transition from virtual to in-person meetings based on real-time conditions. In addition, while emphasizing the value of in-person meetings, IDC recommended that the SEC allow for flexibility on a permanent basis, observing that fund boards seamlessly leveraged videoconferencing technologies during the COVID 19 pandemic to carry out their duties.
• Money market fund reform: IDC submitted a letter to the SEC on the report from the President’s Working Group on Financial Markets, which outlined various reform measures that policymakers could consider to improve the resilience of money market funds and the broader short-term funding markets. IDC expressed support for reform efforts that strengthen money market funds against adverse market conditions, as long as the essential characteristics of money market funds are preserved, and they can remain a viable option in the marketplace. Further, IDC recommended that any reform efforts stay away from a one-size-fits-all approach, while providing high-level guidance that enables funds and their boards to continue to prudently exercise their fiduciary responsibilities during periods of market stress.

International

AIFMD review: The European Commission has launched a review of the Alternative Investment Fund Managers Directive (AIFMD)—one of the two core pieces of the EU legislative framework for investment funds. The review will likely result in reforms to the AIFMD’s investor protection regime, financial stability related rules, and the framework for the delegation of activities by AIFMs, including activities undertaken outside the European Union. Reforms to the AIFMD may be carried across to the Undertakings for Investment in Transferable Securities (UCITS) Directive—the other core piece of the EU legislative framework for investment funds.

In January 2021, ICI Global filed a comment letter in response to the Commission’s public consultation on the review and has been engaging with the Commission and other European policymakers. ICI Global has argued against wholesale changes to the AIFMD and the UCITS Directive and has explained that existing rules for the delegation of AIFM functions are sufficiently clear and robust to prevent the creation of letter-box entities, while providing for an appropriate level of supervisory discretion and judgment.

Asia-Pacific retirement savings: Retirement policy reforms continue to be under consideration in Japan and China, as policymakers express interest in growing individual account-based components of their systems.

The ICI Global Retirement Resource Center has a wealth of information, including several “keys” to facilitate members’ discussions with regulators and policymakers. Each key describes one design feature of a successful retirement savings system. In addition, the Japanese translation of How America Supports Retirement: Challenging the Conventional Wisdom on Who Benefits and the Japanese and Chinese translations of related blogs have facilitated communication of key tax policy considerations. The Japanese Embassy also arranged a virtual meeting between ICI Global and a Japanese tax authority regulator to discuss retirement reforms.

Chinese securities: In November 2020, then president Donald Trump issued an executive order prohibiting transactions in identified Chinese military companies by any US person. These prohibitions were novel in many respects and raised numerous questions regarding their precise scope and impact on regulated funds. In June 2021, President Joe Biden issued an amended executive order that similarly prohibits the purchase of securities issued by identified Chinese military-industrial complex companies.

ICI Global proactively engaged with senior officials at the US Treasury Department to make the November 2020 executive order banning trading in certain Chinese securities more workable for regulated funds and successfully obtained guidance allowing investors to continue purchasing regulated funds holding the prohibited securities during the transition period. ICI Global’s continued active engagement with the US Treasury Department contributed to the amended executive order providing clear guidance regarding the covered investing prohibitions, including allowing US advisers to continue to advise non-US funds regarding investment in prohibited securities. During the course of the year, ICI Global communicated regularly with members on the fast-moving developments.

Common ownership in Australia: In July, the Australian Parliament’s House of Representatives Standing Committee on Economics initiated an inquiry into the implications of common ownership and capital concentration in Australia. The committee’s inquiry focused on the extent of common ownership and capital concentration and their influence on investment decisions, market behavior, and competition, as well as the role of regulators in responding.

ICI submitted a comment letter expressing its disagreement with the common ownership hypothesis. The letter highlights the flaws in related academic research, explains that the hypothesis makes unrealistic assumptions, and shows that investors would not necessarily benefit from less intense competition in given industries. The letter also explains that corporate managers likely could not determine which competitive strategy would most benefit common owners or their advisers.

Foreign direct investment: Policymakers in many countries around the world are tightening laws to address concerns regarding foreign investment in businesses that relate to national security. The United Kingdom and Australia are two jurisdictions that have recently made such changes. Many foreign direct investment laws, however, are often drafted so broadly that regulated funds and their managers are getting swept up, though they are neither activist investors intending to change the strategic direction of a company, nor do they intend to take over a company.

ICI Global submitted comments to the Australian government in October 2020 on their proposed foreign investment reforms, requesting that the government consult further on any proposed guidance or exemption from the requirements for certain entities so that interested parties could provide constructive feedback. The Australian government’s reforms went into effect in January 2021, and in August 2021 ICI Global provided additional feedback in connection with a review of the reforms, stating that the mandatory national security notification regime should include exemptions for certain investors, such as regulated funds and asset managers. ICI Global also submitted comments to the UK government in January 2021, requesting that the UK government (1) consider whether and how to narrow the sectors so that there is more clarity regarding the entities that are within scope, or alternatively, provide a list of entities that are within scope, and (2) include an exemption or safe harbor based on investor’s profile (e.g., regulated fund), or alternatively, introduce a preapproval regime. We also established a Foreign Direct Investment Working Group to increase our engagement with members on this issue.

Global pensions: As national systems face demographic pressures, policymakers worldwide are considering pension system reforms to help citizens build more retirement savings.

ICI provided extensive input to the Working Party on Private Pensions (WPPP), a group of national pension regulators from Organisation for Economic Co-operation and Development (OECD) member countries that conducts research on retirement systems. Specifically, ICI offered feedback on WPPP research papers, including perspective on the importance of offering a full range of investment options to retirement savers, and the growth of account-based retirement savings in the United States, including the full array of retirement plans available to self-employed and small employers.

Remuneration: Both the European Union and the United Kingdom have made changes to the remuneration requirements for investment firms this fiscal year. In December 2020, the EBA issued a consultation on guidelines on sound remuneration policies under the Investment Firms Directive and Regulation (IFD), which was adopted in late 2019. The UK Financial Conduct Authority (FCA) issued three consultations in connection with its implementation of the new Investment Firms Prudential Regime in the United Kingdom, which is based on the IFD, and which includes substantial changes to firms’ requirements on remuneration.

ICI Global submitted a letter to the EBA seeking, among other things, clarity on the effective date of the rules and application in the group context. ICI Global also filed two letters with the FCA advocating for clarity and/or flexibility on the identification of material risk takers subject to the requirements, and the scope and application of the rules when multiple remuneration codes apply. In September, ICI Global held a webinar on the new UK regime to help members better understand its requirements.

Retail investment strategy: Through its multiyear capital markets union (CMU) initiative to create a single EU market for capital, the European Commission is seeking to develop a legal framework for retail investment that enhances the participation of EU citizens in the capital markets.

In August 2021, ICI Global filed a comment letter supporting the Commission’s objectives for a European retail investment strategy. ICI Global noted that while the EU regulatory framework for retail investment largely contains the right protections, it does not sufficiently empower retail investor engagement in EU capital markets, particularly on a cross-border basis and when using digital technology. ICI Global recommended enhancements to empower all EU investors to invest in the capital markets, broaden the range and choice of UCITS for all retail investors, and improve investors’ experience of fund subscription by enabling funds to use digital innovation and technology. Furthermore, ICI Global recommended reforms to enable EU investors to access a broad range of suitable investment products, ensure they have appropriate access to investment services, and provide them with useful information to compare products and make informed investment decisions.

Supervisory convergence: In March 2021, the European Commission launched a consultation on supervisory convergence and the single rule book, which will be part of the upcoming required review of the ESAs’ founding regulations.

ICI Global’s May 2021 response urged the European Commission to issue a more targeted consultation after the Commission and market participants have assessed the impact of the ESAs’ January 2020 amendments. We stated that the European Securities and Markets Authority (ESMA) can operate most effectively if it is well-resourced and performs its functions as an independent, nonpolitical regulatory body and that enhancing ESMA’s powers in getting information about national supervisory practices would advance efforts for convergence.

Operations

Anti–money laundering: In September 2020, the Financial Crimes Enforcement Network (FinCEN) issued an advance notice of proposed rulemaking (ANPRM) seeking comment on a wide range of issues related to anti–money laundering (AML), including whether FinCEN should (1) define and require that financial institutions maintain an “effective and reasonably designed” AML program; and (2) issue a list of national AML priorities every two years, to assist financial institutions with their AML risk assessments.

In response, ICI’s November 2020 comment letter emphasized the unique relationships among mutual funds, intermediaries, and fund shareholders, as well as the low-risk nature of mutual funds as potential money laundering tools. We further emphasized that any codification of a written risk assessment requirement should allow for the greatest amount of flexibility, so that mutual funds can determine the best way to assess and document relevant risks. In December 2020, ICI’s AML Compliance Working Group began meeting quarterly (rather than annually) to increase member interaction and information sharing.

In January 2021, Congress enacted the Anti–Money Laundering Act of 2020, which, among other things, mandates the establishment of a national registry requiring companies to disclose the identity of their beneficial owners. The aim is to prevent money laundering and the financing of terrorism through shell companies. In April 2021, FinCEN issued an ANPRM to solicit public comment on the implementation of this national registry and its other legislative mandates.

ICI’s May 2021 comment letter urged FinCEN to align its rulemaking to the current customer due diligence rule requirements as closely as possible. ICI maintained that a consistent approach for AML compliance, implementation, and enforcement, as well as the information collected for the FinCEN database, will make for a more useful and efficient regime for both law enforcement and financial institutions meeting their AML program obligations.

Business continuity: ICI’s Technology Committee has, for more than 20 years, addressed members’ needs to discuss business disruption events through ICI’s Business Continuity Planning Subcommittee. Through many different emergencies, ICI members have come together to share valuable information and strategies on events that threaten normal business operations. In December 2020, ICI formally established a separate Business Continuity Planning Committee, which includes those individuals responsible for business continuity enterprise-wide. One of the first actions the committee undertook was to update the Business Continuity Survey to include questions on the impact of COVID-19. Results will be shared with firms that participated in the survey and provide a sector-wide view of how business continuity programs are structured.

Cybersecurity Benchmarking Survey: In June 2021, ICI disseminated its seventh annual Cybersecurity Survey to members. This is the only survey of its kind to gather detailed data on information security programs across the mutual fund sector. Results from the more than 160 questions are anonymized, aggregated, and tiered by assets under management so that firms can compare their programs to their peer group and to the industry as a whole. The survey asks questions on authentication, policies and procedures, outsourcing, encryption, cloud security, COVID-19 work from home controls, and much more. The annual results provide a rich and unique view into the information security programs in the investment management sector as well as how these programs evolve to address ever-changing threats.

Fintech: The financial services industry is on the cusp of unprecedented change: bitcoin, stablecoins, and other uses of blockchain are growing fast. These developments are disrupting the existing financial services infrastructure and offer entirely new business models and opportunities for the regulated fund industry.

As part of its mission to inform members about fintech developments, ICI launched the Fintech Forum in 2021. In this webinar series, ICI brings leading experts in the field to our members, policymakers, and regulators to help them explore the advantages that fintech innovations can offer to investors. Topics have included cryptocurrencies and digital assets, stablecoins, and custody of digital assets.

Fraud prevention: The COVID-19 pandemic provided a multitude of opportunities for fraudsters to expand their fraudulent schemes—identity theft, romance scams, and other swindles—increasing the threats to fund shareholders.

ICI continued its critical role supporting members’ fraud prevention efforts on several fronts. First, we helped members protect against employment fraud—for example, fraudsters using employees’ information to apply for unemployment benefits, or using firms’ logos to create fake job postings—which increased significantly during the pandemic. In addition, ICI launched its Fraud Prevention Resource Center and continued to publish its quarterly fraud incident reports and year-over-year comparisons to help keep members updated on the fraud landscape. Finally, ICI continued to serve as a conduit for members to share real-time fraud alerts with working group participants.

Interval fund repurchases: A significant barrier restraining the growth of interval fund distribution is the need to warehouse repurchases (redemptions) until processing can occur at the end of an interval fund’s repurchase period—typically four times a year. Warehousing creates significant operational risk for intermediaries, impedes receipt of anticipated activity information by asset managers, and runs the risk of a poor shareholder experience if warehoused order submissions are somehow missed.

As part of its initiative to expand interval fund distribution through improved operational efficiencies and practice standardization, the Interval Funds Task Force of ICI’s Broker-Dealer Advisory Committee (BDAC) has finalized changes to DTCC Fund/SERV® to allow interval fund repurchases to be sent throughout a repurchase period. This eliminates the risks associated with order warehousing by facilitating efficient, straight-through order processing, while providing timely delivery of anticipated repurchase activity to interval fund providers. The DTCC will implement the changes in first quarter 2022.

Return to office: COVID-19 infection rates, hospitalizations, morbidity, and US government policy statements were constantly evolving as organizations were trying to address return-to-office policies.

In response, ICI’s Technology, Chief Information Security Officer, and Business Continuity Planning Committees conducted far-ranging and thoughtful discussions on return-to-office strategies throughout the year at bimonthly meetings. Discussions centered on US and global safety protocols, travel, information security, supply chain disruption, workplace modifications, and much more. These discussions continue to take place at each of these committee meetings.

Right-time data delivery: Efficient back-office operations for mutual funds and their intermediary counterparties require having the right data at the right time. For example, a fund’s liquidity management benefits from knowing an intermediary’s intraday trading activity. Operational resilience improves when funds can rapidly receive, review, and approve an intermediary’s trade estimates that result from processing delays. Funds help intermediaries efficiently process orders by timely delivery of machine-consumable NAV, dividend, and capital gain details. These needs persist while funds and intermediaries strive to modernize their operations and consistently deliver a positive shareholder experience.

The right-time data delivery task forces of ICI’s BDAC and Bank, Trust, and Retirement Advisory Committee are exploring the timely data delivery necessary to support trade, NAV, dividend, and capital gains, within the context of evolving fund operations. Through an exploration of timing requirements, workflows, available data, and the current and emerging technologies to support these needs, the task forces seek to share with the industry operational efficiencies, recommended practices, and potential new ways to perform these mission-critical functions that reduce operational risk.

Retirement

ESG and proxy voting regulations: In late 2020, the DOL finalized two regulations relating to ESG investing and proxy voting by ERISA fiduciaries. While both final regulations were significantly improved (as a result of strong pushback from ICI and others), ICI continued to urge additional clarification. In 2021, the Biden administration reexamined the rules and issued a new proposal, which promises to further improve the rule.

ICI has continued its advocacy, expressing our concerns about these rules in multiple meetings with DOL staff. Successes from our advocacy include a policy to delay enforcement of the two final regulations and a proposal for additional improvements to the regulations.

Fiduciary rulemaking: In December 2020, the DOL issued its final prohibited transaction exemption that permits investment advice fiduciaries to receive compensation for their advice on retirement plans and IRAs. The final exemption is dramatically narrower in scope than the 2016 fiduciary rulemaking, which significantly expanded the range of persons treated as fiduciaries to retirement plans or IRAs. After the change in presidential administrations in 2021, the Biden administration announced that it would allow the final exemption to become effective as scheduled on February 16, 2021. In April 2021, the DOL issued compliance FAQs related to the exemption.

ICI advocated for the strong investor protections included in the exemption, and strongly urged the DOL to allow the exemption to become effective as scheduled in February, arguing that further delay would only cause harm to retirement savers.

Lifetime income disclosure rulemaking: In August 2020, the DOL issued an interim final rule implementing the new lifetime income illustration requirement for defined contribution retirement plans. This requirement to provide annuity-based income stream estimates was included in the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act), a broad package of retirement plan reforms enacted by Congress in December 2019. The interim rule, which became effective in September 2021, prescribes the assumptions to be used in calculating the annuity estimates and provides a model lifetime income disclosure.

ICI submitted a comment letter to the DOL in November 2020, recommending several changes to the assumptions and model disclosure. Our letter also urged the DOL to provide guidance preserving the continued use of alternative methods of illustrating retirement income. We noted that many ICI members already provide lifetime income illustrations that help plan participants understand what their account balance will generate in retirement and what changes to their savings habits will improve outcomes. ICI continues to advocate for guidance to ensure that the innovative and effective retirement income illustration methods and tools already in use today (or those yet to be developed), are not supplanted by the “one-size-fits-all” annuity approach required by the SECURE Act.

SECURE Act implementation: On December 20, 2019, the president signed into law the Further Consolidated Appropriations Act, 2020 (H.R. 1865), which includes the SECURE Act. The SECURE Act makes several changes intended to encourage greater participation and savings in defined contribution plans and IRAs and to allow savers to better manage their assets in retirement. The legislation is far-reaching and requires implementing guidance from the DOL, IRS, and Treasury Department.

Many provisions of the SECURE Act have yet to be implemented and the ongoing pandemic has delayed much-needed guidance from the agencies on technical issues. ICI continued to engage with the DOL, IRS, and Treasury Department to convey, through formal comment letters and informal conversations, the guidance financial institutions need to implement the legislation.

US retirement savings: On the heels of the SECURE Act, Congressional interest in retirement savings remains strong. Several bipartisan retirement bills were introduced in Congress, with proponents aiming to build on the SECURE Act’s improvements to defined contribution plans. Bills would make changes such as requiring adoption of automatic enrollment, increasing catch-up contributions for older workers, expanding the Saver’s Credit, further increasing the age for required distributions, and streamlining participant notice requirements.

ICI engaged with members and staff of the Senate Finance and House Ways and Means Committees to support policies that will benefit retirement savers by preserving choice and flexibility, expanding tax credits, and making it easier for employers to offer workplace retirement plans.

Tax

Digital economy OECD initiative: The OECD is crafting global solutions to tax challenges arising from the “digitalizing economy.” These initiatives are not limited to “digital” companies, but instead will affect all firms that operate globally by fundamentally changing the existing international tax regime. These changes will expand taxing rights for market jurisdictions (“Pillar One”) and provide a minimum tax on global profits (“Pillar Two”).

ICI prepared detailed submissions to the OECD and advanced our concerns with officials from various governments, including the US Treasury Department. Our detailed comments are reflected in the Pillar One exemption for “regulated financial services” and the general Pillar Two exemption for funds.

European tax recovery: The “free movement of capital” article of the Treaty on the Functioning of the European Union prevents discrimination favoring EU taxpayers over comparable non-EU taxpayers. Two favorable decisions by the European Court of Justice have been cited by funds claiming that EU member states cannot tax dividends paid to US funds while exempting “comparable” local funds from the same tax.

For many years, ICI has been helping members recover taxes imposed by some EU member states on US funds while those countries exempted “comparable” local funds from those taxes. By working with members, meeting with foreign tax officials, submitting detailed memoranda, and testifying in court, ICI has assisted members in recovering several billion dollars this year from France and other EU countries. ICI continues to support our members’ efforts in recovering these assets.

Financial transaction tax proposals: New York and New Jersey proposed financial transaction taxes this past year. These proposals were advanced, in part, to address depressed tax revenues experienced by the states during the pandemic. Both proposals would have applied to the overwhelming majority of fund portfolio transactions, reducing investor returns on a dollar-for-dollar basis.

ICI successfully advocated against the proposals, including submitting written testimony in New York and New Jersey and providing oral testimony in New Jersey. ICI detailed how most studies have found that these taxes raise far less revenue than predicted and result in tremendous efforts to avoid the tax through financial engineering. The unintended consequence of these bills would harm American retirement savers with moderate incomes.

India surcharge tax: The 2020 Indian budget included a new mechanism to impose a tax surcharge on dividends paid to noncorporate foreign portfolio investors.

Following ICI Global’s advocacy, the Indian government capped the rate of the enhanced surcharge tax rate imposed on dividends; shareholders in US funds benefit from this change because the capped rate is lower than the treaty rate provided in the US treaty with India.

Tax legislation: 2017 tax legislation included changes to the rules governing the timing of income for tax purposes, which raised uncertainties regarding certain types of discount on debt and possibly created administrative burdens for regulated investment companies (RICs) and other taxpayers. The legislation also placed new limits on interest expense deductions for corporations.

In fiscal year 2021, ICI submitted comment letters and met with Treasury and IRS officials seeking regulatory guidance on these issues. As requested by ICI, the IRS issued final regulations providing that the new income timing rules generally do not apply to market discount and original issue discount. The IRS also issued final regulations, in response to ICI’s request, permitting RICs to pass through “interest-related dividends,” thus allowing corporate shareholders to use interest expense to fully offset such income.

UK capital gains taxation: The United Kingdom modified its registration, reporting, and taxation rules for nonresident investments in real estate, creating substantial issues for investment funds.

ICI led a global industry coalition that successfully urged the United Kingdom to provide a de minimis exception for non-UK funds investing in real estate investment trusts (REITs) holding UK property. This exception, as we urged, is retroactive to the new law’s effective date.