2023 Review: AIMA in North America

2023 was another very active year for AIMA’s work in North America as we continue our industry leading activity in regulatory advocacy, member outreach and education programming.

AIMA's work in the US was again focused mostly on the Securities and Exchange Commission’s (SEC) rulemaking docket, resulting in AIMA submitting more regulatory proposals responses in North America than any other region. This was an opportunity to demonstrate AIMA’s exceptional implementation work as the SEC turned to finalising several of the rules that were proposed in recent years. Of course, the SEC continued to issue a number of impactful proposed rules in 2023, several of which are noted in this summary.

AIMA’s implementation work consisted of summaries of the final rules, webinars, the establishment of peer groups, and more.

Ongoing Litigation

In August, the SEC finalised a package of rules and amendments – better known as the Private Fund Adviser Rules (PFAR) – that radically alters investor disclosure practices, restricts some activities concerning fund expenses and more. As a result, AIMA joined five other associations to challenge the legality of PFAR in federal court. A final decision in this case could be reached by the end of May 2024.

In December, AIMA joined an industry challenge against the SEC’s securities lending and short sale rules that were adopted in October, arguing, among other things, that the scope and disclosure framework adopted in the securities lending rule is arbitrary and capricious, specifically vis-à-vis the disclosure framework adopted in the short sale rule.

Upcoming US Rulemaking

AIMA continued its advocacy and engagement on the SEC’s proposed changes to the definitions of ‘dealer’ and ‘government securities dealer’. We have submitted three responses to the comment file and regularly speak with Congressional members and their staff, members of the media, and others to explain the many negative impacts the rule could have on markets, hedge funds/advisers, and investors. A final rule could be published by the end of 2023 or in Q1 2024.

In February, the SEC proposed a package of rule changes that would fundamentally change the existing custody rule, including expanding the requirements for safeguarding ‘funds and securities’ in the current rule to ‘funds, securities, or other positions held in a client’s account’. If adopted, the rules will have a significant, negative impact on financial markets, which is why we encouraged the SEC in our response to withdraw the proposal.

AIMA also responded to the SEC’s consultation on open-end fund liquidity risk management programmes and swing pricing, making the case that a mechanistic approach would be counterproductive and risk undermining managers’ fiduciary duty to their investors.

In July, the SEC issued a proposed rule that will require investment advisers to assess the use, or potential use, of ‘covered technology’ in investor interactions for conflicts of interest. If such conflicts prioritise the firm’s or its associated person’s interests, they must be eliminated or neutralised. We requested the SEC withdraw the proposed rule for various reasons. These include the vagueness and unworkability of the definitions of ‘covered technology’, ‘conflicts of interest’, and ‘investor interaction’, and our view that the proposal should not apply to private fund advisers.

Canada

AIMA Canada led political advocacy alongside CFA Societies Canada, the Emerging Manager Board, and PMAC, to grow support for emerging manager programmes in Ontario, British Columbia, and Alberta, aiming to mirror the success of the existing Quebec Emerging Manager Program. AIMA Canada commented on the CSA (Canadian Securities Administrators)/CIRO Short Selling Consultation and held multiple meetings with regulators. In a notable achievement, NI 81-102 exemptive relief was granted to an AIMA member, allowing for leverage limits and the use of the Value at Risk approach. AIMA played a consultative role to the regulators in this process.

Tax

Our focus at the international level on the implementation of the BEPS 2.0 two Pillar solutions has been aimed at monitoring developments and speculating whether we will indeed see global implementation of the new framework. While Pillar Two has been implemented in the EU via a Directive on minimum taxation, significant uncertainty exists regarding the finalisation of Pillar One, and whether the US will agree to its implementation.

Taken together, the two Pillar solutions would refocus existing rules on taxing Multinational Enterprises (MNEs) and avoid the various forms of digital services tax (DST) which have been introduced or threatened globally. There are exemptions for regulated financial services businesses and investment funds, but these may not be straightforward to claim, particularly for funds with complex asset-holding structures or which are majority-owned by insurance business MNEs. The end of 2023 does not bring us any closure on the long-running saga of international taxation, and we will need to wait and see whether progress is made in 2024.

Looking head