On October 11, 2022, the Financial Stability Board (FSB) released a proposed framework for global regulation of crypto assets (the Proposed Framework). In connection with the Proposed Framework, the FSB also issued (1) a consultation regarding the regulation, supervision and oversight of cryptoasset activities and markets (Cryptoasset Recommendations) and (2) a consultative report on “global stablecoin” arrangements (Stablecoin Recommendations).
The FSB seeks public comment on the framework and recommendations by December 15, 2022. The FSB intends to finalize its recommendations by mid-2023.
The Proposed Framework sets forth general principles for comprehensive international regulation of cryptoassets and stablecoin arrangements.
The Cryptoasset Recommendations set forth nine proposed recommendations for the regulation and supervision of cryptoasset activities and markets. They are focused on regulatory and supervisory issues broadly and do not comprehensively address specific risk categories.
The FSB issued a report with 10 high-level recommendations on the regulation and supervision of global stablecoin arrangements in October 2020. The Stablecoin Recommendations update these recommendations in light of recent cryptoasset market developments. FSB’s analysis of several of the largest stablecoins indicates that most existing stablecoin arrangements do not meet these recommendations and significant improvements are to be made to their governance, risk management, redemption rights, stabilisation mechanisms and disclosures.
U.S. Bank is closely monitoring developments in the crypto assets space and is engaging with the industry on a joint response to the FSB’s consultation.
On June 17, 2022, the Securities and Exchange Commission (SEC) published two new rule proposals that will impact the fund and investment management industry.
Section 35(d) of the Investment Company Act of 1940 prohibits a registered investment company from adopting as part of its name any word or words that the SEC finds are materially deceptive or misleading. The SEC seeks to update the Names Rule to account for changes in the funds marketplace since the rule was adopted in 2001. Under the proposal, the Names Rule would extend to investment options that meet certain environmental, social or governance (ESG) criteria. The SEC intends the proposed amendments to the rule to modernize and enhance investor protection.
Salient points in the proposal are:
The SEC is proposing to amend rules and forms under both the Investment Adviser Act of 1940 and Investment Company Act to require registered investment advisers, certain advisers that are exempt from registration, registered investment companies and business development companies (BDCs) to provide additional information regarding their ESG investment practices..
The proposal is designed to provide consistent standards for ESG disclosures, allowing investors to make more informed decisions as they compare various ESG investments..
Under the proposal, funds that consider ESG factors in their investment process would be required to disclose additional information regarding their strategy. The level (amount) of required disclosure depends on how central ESG factors are to a fund’s strategy. The ESG disclosure contemplates three types of ESG funds/strategies:
Based on the proposed amendments, funds and advisers would need to adopt new compliance policies and procedures regarding their ESG-related strategies in order to help ensure the accuracy of the various prospectus and brochure disclosures.
The two proposals have raised some pushback in the fund industry. The Investment Company Institute (ICI), an association representing regulated investment funds, provided the SEC with feedback outlining concerns with certain aspects of the proposed amendments. According to their letter regarding Investment Company Names, the proposed changes to the Names Rule are complex, create interpretive challenges, may limit innovative fund strategies and would increase compliance costs that are generally passed on to shareholders as a fund expense. Similar concerns were raised in their letter regarding Enhanced Disclosures by Certain Investment Advisers and Investment Companies about ESG Investment Practices in which the ICI recommends modifications to avoid negative impact on the fund industry while still achieving the goals set in the proposal. Among the recommendations are revisions concerning the ESG fund strategies: alignment of the definition of ESG-focused fund to the current disclosure framework and practices; enhanced disclosure to be required only for ESG-focused funds, but not integration funds; less-prescriptive prospectus disclosure requirements for ESG-focused funds; adjustment of the impact fund disclosure requirements to the current disclosure framework and impact investing practices.
ESG and sustainable investing overview
ESG and sustainability continues to be a hot topic for both the European Securities and Markets Authority (ESMA) and the Central Bank of Ireland (CBI) and will continue to be for the foreseeable future.
In Ireland, the number of sustainable funds classified as Article 8 and Article 9 continues to grow and the expectation is that this will be a continued area of interest and growth as investors look to make more impactful investing decisions. In our Regulatory Outlook Report, we take you through some of the key regulatory changes over the past few months. As this is an ever-revolving landscape, we will touch on some of the recent developments briefly in this space.
Recent regulations include the European Union (Undertakings for Collective Investment in Transferable Securities) (Amendment) (No.2) Regulations 2022 The European Union (Undertakings for Collective Investment in Transferable Securities) (Amendment) (No.2) Regulations 2022 (Amending UCITS Regulations) came into operation on September 12, 2022.
The Amending UCITS Regulations transpose Commission Delegated Directive (EU) 2021/1270 into Irish law and require Irish management companies to:
Corresponding rules have been imposed on Irish domiciled AIFMs since August 1, 2022, when the Commission Delegated Regulation (EU) 2021/1255 took effect.
On October 10, 2022, ESMA announced its long-term priorities from 2023-2028 and unsurprisingly, ‘enabling sustainable finance’ is a key endeavor. ESMA’s other priorities include focusing on strengthening supervision, enhancing the protection of retail investors, fostering effective markets and financial stability, facilitating technological innovation and effect.
On September 30, 2022, the European Supervisory Authority (ESA) published a final report containing draft Regulatory Technical Standard (RTS) which will amend the Sustainable Finance Disclosure Regulation RTS (the SFDR RTS) due to come into effect on January 1, 2023. The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.
The SFDR requires asset managers such as AIFMs and UCITS managers to provide prescript and standardized disclosures on how ESG factors are integrated at both an entity and product level. A significant portion of the SFDR applies to all asset managers, whether they have an express ESG or sustainability focus or not.
The amendments proposed by the ESAs:
As we move toward the year end, regulators including the Central Bank of Ireland (CBI), have been keeping a keen focus on ESG matters.
In November, the CBI issued an information note: Sustainable finance and the asset management sector: Disclosures, investment processes and risk management.
The information sets out the findings of the CBI’s sampling of investment fund disclosures, sets out expectations around the implementation of the SFDR and the Taxonomy Regulation and provides a roadmap for how the Central Bank will supervise these requirements in the future.
Furthermore, during a recent keynote speech at the Central Bank Asset Management Sustainable Finance Seminar, Deputy Governor Derville Rowland stated in respect of the CBI’s expectations on the industry:
“In light of the above, the Central Bank necessarily has high expectations of the funds sector regarding sustainable finance and has been communicating publicly these expectations over the last two years. We think it is critical that the sector is positioned to support a timely and effective transition to a more sustainable economy, and for this to happen, standards must be high.”
The message is loud and clear from the Irish regulator, and U.S. Bank will continue to monitor this arena.
There will be a growing focus on how depositaries are ensuring that both UCITS and AIFs are complying to their ESG investment rules. Depositaries will be required to consider how they can monitor compliance from an investment compliance monitoring perspective, reporting and recording of potential ESG breaches and to consider when and if these breaches would be reported in the annual financial statements and to the CBI.
Through our engagement at industry level, U.S. Bank Depositary Services is dedicated to solutioning such requirements and working with asset managers to ensure we are meeting the regulator’s expectations in this dynamic and fast changing regulatory landscape. From our partnership with Sustainalytics, we are comfortable that we can meet the regulator’s expectations and continue to provide thought leadership in this area.
For questions or concerns, please contact a member of our team:
Lili Popova-Flashenburg
Vice President, Global Network Management Regulatory Review Manager
(United States)
Phone: +8573382167
Email: lili.popovaflashenburg@usbank.com
Caroline Geraghty
Vice President, Senior Depositary Manager - Europe
Phone: +353873205938
Email: caroline.geraghty@usbank.com