Political Risk to Shape the Future of Asset Management

Earlier this year, the Financial Times (FT) profiled^[1] the new generation of asset management chief executives ascending to leadership positions as significant headwinds face the industry. The FT noted the CEOs collectively “have called time on a ‘golden decade’ for their industry, warning that it is becoming increasingly difficult to navigate the competing pressures of markets, regulators, and politicians.”^[2]

As industry CEOs, executives, corporate affairs officers, communicators, public and government affairs leaders and other stakeholders gather in New York for this week’s FT Future of Asset Management North America conference^[3], it is increasingly clear political risk will play an outsized role in shaping the future of the industry, impacting both corporate reputation and the ability for individual companies to continue to operate.

In Washington and states across America, asset managers of all sizes have come under political and regulatory scrutiny like never before.^[4] Asset managers are now caught in the political crosshairs of state and federal legislators eager to publicize new investigations and oversight efforts. This is a relatively new position for companies in the industry that previously operated under the radar of the U.S. Congress.  

Anti-ESG political backlash in the United States has dominated recent headlines^[5] and shows no signs of slowing down heading into the 2024 presidential election cycle. In Washington, anti-ESG legislation, hearings and subpoenas^[6] continue to pose reputational challenges. At the same time, at the state level, asset managers also navigate the operational challenges from financial blacklists and regulatory action.^[7]

In this evolving political landscape, a bipartisan consensus has emerged to hold China accountable, with ramifications for asset managers.^[8] Members of Congress have been quick to target and scrutinize individual companies with exposure to China and level serious accusations, such as investment in blacklisted Chinese companies, putting pressure on firms to pull out of the country entirely.^[9] The capital markets space remains a battleground as policymakers seek to limit investor dollars flowing into funds that track Chinese securities.

With AI and tech looming as the next great legislative and regulatory quagmire for Congress to solve in the coming decade,^[10] asset managers should keep their eyes on Washington as they race to implement the next significant innovations into their capabilities. AI in asset management has the power to improve operating efficiencies, personalize services, synthesize knowledge sharing and expand research capabilities. While sweeping regulation similar to the EU is unpalatable from a bipartisan perspective, industry-specific lawmaking aimed at modernizing ERISA (Employee Retirement Income Security Act of 1974) and data privacy will likely receive robust consideration and potential passage in a divided Congress.^[11] The U.S. Securities and Exchange Commission (SEC) has recently proposed rulemaking defining how predictive analytics and artificial intelligence are utilized in the broker-dealer industry.^[12] The proposed rules would mandate that a firm “evaluate and determine whether its use of certain technologies in investor interactions involves a conflict of interest that results in the firm’s interests being placed ahead of investors’ interests.”^[13] This represents a potential broadening of the SEC’s authority, which could go beyond sophisticated technologies and should be monitored closely.

The Biden administration has unleashed a regulatory onslaught on the asset management industry. According to the SEC’s agenda published by OIRA, Chair Gensler is on track to both propose and finalize 63 rules, with many posing reputational and operational challenges for asset managers.^[14] On the private funds rule alone, the Financial Times notes, “the SEC estimated as part of its rulemaking process that new requirements for audit statements and quarterly performance reports would cost the industry $961mn annually.^[15] Regulations on unequal treatment of investors, as well as extra staff and legal costs connected to disclosures around fund expenses, would cost another $938mn.”