On May 16, 2016, six federal regulatory agencies – the Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Federal Reserve Board, National Credit Union Administration, Office of the Comptroller of the Currency and the Securities and Exchange Commission – announced that they were requesting comment on a proposed rule under Section 956 of the Dodd-Frank Act to prohibit incentive-based compensation arrangements that encourage excessive risk-taking behavior at a range of financial institutions. As discussed in the June 2016 edition of our Asset Management Quarterly, the proposed rule may put larger investment advisers and investment advisory business that sit within a bank or other financial institutions at a disadvantage when competing for talent, as compared with smaller or independent advisers. Now that the comment period has ended, five leading asset management industry groups, among others, have submitted noteworthy comment letters to the SEC:

• The Securities Industry and Financial Markets Association (SIFMA), representing the broader securities industry, focused on (i) the proposed rule’s rigidity, as being managed by six agencies may make future changes difficult to adopt as market conditions change, (ii) the need for better balance between principles-based guidance and prescriptive rules and (iii) a more nuanced approach to address the different people, roles and activities involved in inappropriate risk-taking, as opposed to normal risk-taking.
• The Managed Funds Association (MFA) and the Alternative Investment Management Association (AIMA), speaking for the private funds industry in a joint letter, focused on (i) scenarios that could lead to miscounting or manipulation of adviser assets when determining whether the adviser is a Level 1, 2 or 3 covered financial institution, (ii) the appropriate application to unregistered advisers, (iii) potential conflicts of the deferral provisions of the proposed rule with existing tax rules relating to deferred compensation, and (iv) differences between profit distributions to a firm’s owners (that by their nature are performance-based as better performance leads to higher profits) and employee compensation payments.
• The Investment Adviser Association (IAA), representing registered investment advisers generally, focused on (i) asset counting for purposes of the Level 1, 2 or 3 determination and issues of adviser subsidiaries and affiliate consolidation, (ii) the need for a clearer definition of “non-proprietary assets” and (iii) conflicts between certain definitions in the rule and similar concepts used in Form ADV.
• The Investment Company Institute (ICI), representing regulated investment funds, including mutual funds and ETFs, focused on (i) the difference between an advisory business that is stand-alone and one that is operationally integrated with a bank or other covered financial institution, (ii) the appropriateness of excluding non-proprietary assets in counting, (iii) types of risk-takers and functions that should be excluded, (iv) types of compensation that don’t encourage inappropriate risk, (v) the danger of discouraging long-term incentive plans, (vi) more liberal use of options plans, and (vii) the definition of “excessive compensation” and dangers to competition.

The general theme of these comments is that, while the proposed rule recognizes that investment advisory businesses are fundamentally different from the banks, broker-dealers and other financial institutions covered by the proposed rule, the proposed rule would have unintended consequences when applied to asset managers and goes much further than is necessary to achieve its goal of deterring excessive risk-taking. In particular, there is substantial overlap in the comments aimed at addressing differences in the structures and types of advisory businesses and how the rules would have a disparate and undesirable effect on certain advisers over others.

It remains to be seen how the regulatory agencies will respond to the particulars of these comment letters.