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SEC Targets $7T Bank Trust Funds for Enhanced Oversight

SEC Targets $7 Trillion Bank Trust Funds for Enhanced Oversight, Proposes Mutual Fund-like Regulations

5/16, 20:10 EDT
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Key Takeaway

  • SEC aims to increase oversight on $7 trillion bank-managed collective investment funds, lacking in liquidity and leverage limits.
  • Gensler proposes rules for better liquidity in money market funds and adjusts regulations affecting investment advisers.
  • New rule mandates immediate customer notification of data breaches, while same-day transaction settlement remains off the table for now.

Regulatory Spotlight on Bank Trust Funds

Top US regulators, led by Securities and Exchange Commission (SEC) Chair Gary Gensler, are advancing efforts to enhance oversight of collective investment funds managed by bank trust departments. These funds, which hold an estimated $7 trillion in assets, currently enjoy exemptions from many of the regulations that other investment funds are subject to under SEC oversight. Gensler emphasized the need for these funds to adopt regulations akin to those applied to open-end mutual funds, highlighting the absence of limits on illiquid investments, minimum liquid asset levels, leverage caps, and requirements for regular investor reporting and independent board oversight.

Gensler's Regulatory Vision

During his tenure, Gensler has introduced a series of regulatory proposals aimed at addressing structural and liquidity risks within the financial system. Notably, a rule finalized in July 2023 mandates minimum liquidity requirements for money market funds during periods of heightened withdrawals. Furthermore, Gensler is considering adjustments to proposals that would expand custody rules for investment advisers and mitigate conflicts arising from predictive data analytics and artificial intelligence use, following significant industry pushback.

Enhanced Protections and Industry Adjustments

In addition to tightening fund oversight, the SEC has issued a final rule requiring financial entities such as brokers, investment companies, advisers, and transfer agents to notify customers in the event of data breaches involving sensitive information. This move underscores the regulator's commitment to consumer protection in the digital age. Meanwhile, the SEC is navigating industry transitions towards faster transaction settlements, with the brokerage sector preparing for a shift to one-day post-execution settlement by May 28. Although there's speculation about moving towards same-day or real-time settlements, SEC official Haoxiang Zhu indicated that such a drastic change is unlikely in the near future.

Management Quotes

  • Gary Gensler, Chair of the Securities and Exchange Commission:

    "Rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, requirement for regular reporting on holdings to investors, or requirement for an independent board."