SEC’s AMAC Recommends Switch to E-Delivery Default, More to Address Operational Issues Relating to COVID-19
November 10, 2020
The SEC’s Asset Management Advisory Committee (AMAC) has made preliminary recommendations to address COVID-19-related operational issues, including electronic delivery, remote work, e-authorization, and dematerialization. The AMAC was formed to provide the SEC with diverse perspectives on asset management and related advice and recommendations.
The AMAC suggested the following permanent regulatory changes to “minimize the need for physical processes in favor of leveraging efficient and safe digital alternatives.”
Recommendations Regarding Digital Delivery
An industry consensus appears to be forming on an appropriate e-delivery framework for delivering required disclosures. In his opening remarks at the AMAC meeting, SEC Chairman Jay Clayton noted that among the “pandemic’s most obvious disruptions were those challenging firms’ ability to deliver paper documents to investors.” Clayton further reiterated that the SEC “should consider how to best and promptly update our guidance to make it easier for funds, advisers and investors to use electronic delivery, while ensuring that any investor who wants paper delivery remains fully able to receive it.”
The IAA has long advocated for the SEC to further promote the use of e-delivery as a reliable and cost-efficient means for advisers to deliver required disclosures to clients. Current guidance relating to e-delivery of required disclosures dates back to a series of SEC interpretative releases between 1995 and 2000. Under that guidance, an investment adviser may satisfy its ongoing disclosure delivery obligations by providing notice that the information is available electronically, ensuring effective access to such information, and by either evidencing actual delivery or obtaining informed consent from clients. In practice, many advisers have been reluctant to use e-delivery due to the implementation issues and lack of clarity associated with the current consent requirements, even though it would be much more efficient and cost-effective for those advisers to do so.
The AMAC is preliminarily recommending that the SEC:
- Update its rules and interpretations, incorporating appropriate investor protection principles that include notice, choice, and safeguards (with respect to invalid or inoperable digital contact information) to permit firms to use an investor’s digital address, such as an email or smart phone telephone number, as the primary address when delivering regulatory documents, and that it work closely with applicable self-regulatory organizations (SROs) (g., FINRA) to evaluate and harmonize SRO rules with any changes to the SEC’s approach to digital delivery.
- Clarify that the SEC’s rules and interpretations apply to the delivery of regulatory documents instead of being regulated under the E-Sign Act by replacing confusing terminology that appears in SEC and FINRA rules.
The IAA along with several other industry trade groups recently issued a discussion paper urging the SEC to update its regulations to establish e-delivery as the primary means for delivering required disclosures to investors by shifting its approach from the current “delivery with consent” model to a notice and access approach. The AMAC’s recommendations are broadly consistent with this approach.
The IAA is in the process of formulating specific recommendations regarding an e-delivery framework and encourages members to provide feedback regarding this important initiative by contacting IAA Associate General Counsel Sanjay Lamba at sanjay.lamba@investmentadviser.org.
Recommendations Regarding Remote Work
The AMAC recommends, among other things, that the SEC:
- Issue exemptive or interpretive relief to make permanent its existing relief from the in-person voting requirements for mutual fund boards.
- Work with FINRA to modernize its internal inspection supervision rule to provide broker-dealers the flexibility to conduct remote technology-assisted inspections.
- Coordinate with the North American Securities Administrators Association (NASAA) and FINRA to make permanent remote testing capabilities for the Series 6, 7, 63, 65 and 66 securities licenses, and expand online testing capabilities to cover all qualification exams.
Recommendation Regarding E-Authorizations
The AMAC recommends that the SEC consider adopting rules that permanently allow for digitized methods of authorization, including those relating to manual wet signature requirements and notarizations, in coordination with FINRA, other regulators, and states where applicable.
Recommendation Regarding Dematerialization
The final AMAC recommendation is for the SEC to hold a roundtable on the topic of the dematerialization of physical (paper) security certificates (i.e., moving from physical certificates to electronic bookkeeping) and inviting the views of issuers, transfer agents, broker-dealers, clearing corporations, banks, investors, regulators, exchanges, underwriters, and industry experts to help inform future SEC action on this topic.
The AMAC also welcomed Renee LaRoche-Morris, Chief Operating Officer of BNY Mellon Investment Management, as the newest Committee member. LaRoche-Morris replaces Mark Tibergien, who retired as CEO of BNY Mellon/Pershing Advisor Solutions in June.
The AMAC’s next meeting will take place on December 1 and will include discussions from: (i) the Private Investments Subcommittee; (ii) the ESG Subcommittee, including potential recommendations from that subcommittee; and (iii) the Diversity & Inclusion Subcommittee, including a panel discussion on improving diversity and inclusion.
TAGS: E-Delivery, COVID-19, Coronavirus, AMAC