Regulatory change is nothing new in the investment management space, but with AI and other technological developments demonstrating the potential to have a truly transformative impact on the industry, the pace of change looks set to accelerate. Anna Maleva-Otto (pictured), partner, at law firm Schulte Roth & Zabel, outlines some of the challenges ahead and the likely areas of focus for the SEC and FCA.
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Regulatory change is nothing new in the investment management space, but with AI and other technological developments demonstrating the potential to have a truly transformative impact on the industry, the pace of change looks set to accelerate. Anna Maleva-Otto, partner, at law firm Schulte Roth & Zabel, outlines some of the challenges ahead and the likely areas of focus for the SEC and FCA.
In what areas has your firm experienced the most significant growth?
Over the last decade, regulatory changes have shaped the investment management industry. Our global investment management regulatory practice has grown significantly to support our client base, which features more than half of the world’s 100 largest hedge funds.
Are there upcoming regulatory updates which could affect your business and that of your clients?
An increased use of technology, alternative data and artificial intelligence in the investment process continues to be a major industry trend. This has already led to enforcement in the alternative data space, and it is clear that rule-making will follow. Extensive use of technology also highlights the importance of operational resilience and adequate risk management. Both the FCA and SEC are focused on this topic.
Fundamental SEC private fund reforms aimed at enhancing valuation policies and record-keeping and prohibiting certain practices are also likely to be finalised soon.
By contrast, the UK is looking at streamlining regulation to make the UK markets more competitive post-Brexit. We will see whether this is the beginning of another round of the “regulation lite” race from the noughties!
Do you see the industry changing fundamentally over the course of the medium to long term? Are there any trends which have been given over-inflated importance?
A continuing trend is sustainable investing. We have seen some investors prioritise ESG-focused strategies, especially in the context of the EU sustainable finance regime, SFDR. We saw a tremendous interest in the SFDR Article 8 & 9 labelling system for ESG-focused funds early on. Fewer managers are now seeking to claim such designations. This is, in part, the result of the rule-making aimed at stopping greenwashing, but also due to the unavailability of reliable ESG data required to meet the portfolio reporting obligations under SFDR.
Across the Atlantic, we have seen a pronounced political backlash in some US states against ESG strategies highlighting the tension between an adviser’s fiduciary duty to maximise returns and ESG impact investing.
What are the primary challenges your firm and your clients are facing and what is critical to these being overcome?
Surviving in a constantly changing regulatory environment means allocating increasingly greater resources, especially costly technology solutions, to regulatory compliance. In many cases, this leads to regulatory fatigue and lack of attention by senior managers – a dangerous outcome because regulatory supervision and enforcement are also on the rise. Recently, we have seen an unprecedented rise in SEC exams of UK-based managers. Regulators are also becoming particularly intrusive about retention and monitoring of electronic communications and the use of WhatsApp and other off-channel communication methods by staff.
How can you best ensure you deliver value-add to your client base?
Our client base provides us with tremendous opportunities to see trends and market practices as they emerge and anticipate our clients’ needs. We aim to provide our clients with timely and topical updates on industry and regulatory developments. We also gather roundtables to facilitate debate on the challenges and solutions our clients are seeing.
Over the years, we have invested in technology to improve efficiency in delivering fund documentation. Our database of country reports available to our clients now includes information on both global private fund marketing rules, as well as beneficial ownership and position reporting filings in key financial markets.
Anna Maleva-Otto, Partner, Schulte, Roth & Zabel – Anna Maleva-Otto concentrates her practice on a range of UK financial services regulatory matters, including the impact of EU directives and regulations. She advises on all aspects of the establishment and operation of FCA- regulated businesses in the United Kingdom, as well as trading on UK and EU markets. Anna frequently participates in industry working groups in connection with new and emerging regulatory initiatives, and has advised asset managers on several key pieces of recent EU legislation (including GDPR, Short Selling Regulation, AIFMD, MiFID II, MAR, EMIR, SFTR and Securitisation Regulation). Anna also frequently assists clients with the design of their compliance policies and procedures, internal investigations and staff training. Anna is listed in The Legal 500 UK as a “Leading Individual” in Investment Fund Formation and Management – Hedge Funds and a “Recommended” lawyer in Financial Services: Non-Contentious Regulatory. An interviewee described her as “excellent – highly responsive, well informed and pragmatic in her advice, and a pleasure to work with.” She has also been named among the world’s “50 Leading Women in Hedge Funds” by The Hedge Fund Journal. Anna frequently speaks and writes on topics related to her areas of expertise. For the past three years, Anna has co-authored the UK chapter in the Chambers Alternative Funds Guide – a guide examining key industry trends and regulatory and tax matters impacting funds, managers and investors. Anna has also worked with AIMA to produce MiFID2 – A Guide for Investment Managers and authored the “Insider Trading Law in the United Kingdom” chapter in the Insider Trading Law and Compliance Answer Book (Practising Law Institute). Her recent speaking engagements have addressed topics such as market abuse, insider dealing, best practices for electronic communications and MiFID II. Anna is admitted to practice in England and Wales, and New York.
