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About Confluence

Confluence is a global leader in enterprise data and software solutions for regulatory, analytics, and investor communications. Our best-of-breed solutions make it easy and fast to create, share, and operationalize mission-critical reporting and actionable insights essential to the investment management industry. Trusted for over 30 years by the largest asset service providers, asset managers, asset owners, and investment consultants worldwide, our global team of regulatory and analytics experts delivers forward-looking innovations and market-leading solutions, adding efficiency, speed, and accuracy to everything we do. Headquartered in Pittsburgh, PA, with ~700+ employees across North America, the United Kingdom, Europe, South Africa, and Australia, Confluence services over 1,000 clients in more than 40 countries. For more information, visit www.confluence.com

About Confluence

Confluence is a global leader in enterprise data and software solutions for regulatory, analytics, and investor communications. Our best-of-breed solutions make it easy and fast to create, share, and operationalize mission-critical reporting and actionable insights essential to the investment management industry. Trusted for over 30 years by the largest asset service providers, asset managers, asset owners, and investment consultants worldwide, our global team of regulatory and analytics experts delivers forward-looking innovations and market-leading solutions, adding efficiency, speed, and accuracy to everything we do. Headquartered in Pittsburgh, PA, with 800+ employees across North America, the United Kingdom, Europe, South Africa, and Australia, Confluence services over 1,000 clients in more than 40 countries. For more information, visit www.confluence.com

Although U.S. elections have always been highly significant for both global and national stock markets, the president's influence on the economy and markets is typically indirect and limited. While changes in the White House create uncertainty in the markets, and uncertainty is generally bearish, changes caused through fiscal policy and economic agendas have a more direct impact on price movements.

During his earlier term in office, Trump frequently proclaimed market records on social media, viewing them as a hallmark of his administration's success. With stock market success being one of his favorite indicators of the nation’s performance, let’s dive into the history of S&P’s performance post-election years, with a focus on how the market fared during Trump’s previous presidency.

Has the stock market acted differently based on whether a Republican or Democrat is President? The chart below shows S&P’s performance in the post-election years since 2001.

While these returns cannot be entirely credited to the president in office at the time, other factors have significantly influenced them, such as the Tech Crash in 2001 and the COVID-19 vaccine in 2021; the policy and economic responses to these events by the sitting president highly impact the effect of these events to the investor reaction.

MAGA

Just hours after Trump’s surprise victory on November 8, 2016, anticipation of significant tax cuts and financial deregulation sparked a stock market rally, driving the S&P 500 up by 5% within a month. Despite the challenges of being in office during the worst global pandemic in over a century, which kept Americans at home for nearly a year and led to a significant economic downturn, coupled with geopolitical tensions from the U.S.-China trade war, Trump managed to sustain strong performance in most cyclical momentum stocks.

As anticipated, Trump’s focus on infrastructure and domestic manufacturing has boosted the momentum stocks of the industrial and materials sectors.

While defensive momentum stocks largely struggled during the beginning of his term, the Utilities sector experienced growth following the onset of the global pandemic in 2019.

While information technology has lately been a key sector under the radar of U.S. investors, let's explore other sectors that flourished during Trump’s presidency.

As “America First" policies largely involve tariffs, these encourage more manufacturing to return to the U.S. by reducing the cost advantages of offshoring production. The below chart depicts the performance of the top 10 momentum stocks in the materials sector compared with the overall USA momentum stocks during President Trump’s first term in office:

Given that the materials sector consistently outperformed the market from 2017 to 2021 and that Trump’s tariff policies are likely to continue from his previous term, the sector should remain a key focus for investors this term.

Apart from industrials and materials among the cyclical sectors, financials, and consumer discretionary value stocks had a significant impact on the market before the global pandemic.

Trump’s inclination to increase deregulation led to a significant profit for large value-based financial sector securities. Large bank and financial stocks also gained momentum, fueled by expectations of deregulatory measures and pro-growth policies.

The financial titans are again poised to benefit from the expected regulatory rollbacks of the incoming second Trump administration.

MAGA 2.0

This time, through deregulation, tariffs, and increased local production, Trump’s policies are expected to strengthen some of the same sectors as his previous term while also benefiting some previous-term laggards. Given that taxes and tariffs were central to Trump’s successful campaign, along with his track record of pro-business policies, his economic agenda is expected to foster a favorable environment for certain industries, such as the following:

The prospect of fiscal stimulus and economic growth could stimulate demand for industrial goods and materials.

Trump has been a strong advocate for cryptocurrency, promising at the Bitcoin 2024 conference to make the United States "the crypto capital of the world.” Trump also promised to establish a Bitcoin and crypto presidential advisory council to help deregulate the industry. Cryptocurrency supporters are hopeful that his return to the White House will lead to a more streamlined approach for Bitcoin.

The promise of faster economic growth and more market-friendly policies under Trump is expected to drive small-cap stocks higher. This is driven by his support for lower corporate taxes, deregulation, and pro-growth measures that favor domestic industries, all of which would stimulate the U.S. economy and benefit riskier assets.

Investors anticipate a "golden age of America" as President Trump prepares to take office for his second term and make America great again.

The information contained in this communication is for informational purposes only. Confluence is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

The trend on presenting net returns in marketing materials and technology's role in the process

The SEC Marketing Rule, adopted in late 2020 with a mandatory compliance date of November 4, 2022, significantly overhauled the marketing and advertising framework for SEC-registered investment advisers. One major part of the rule requires that an Advisor presenting gross performance must also present net performance “with at least equal prominence to, and in, a format designed to facilitate comparison with the gross performance, and calculated over the same time period and using the same type of return and methodology as the gross performance.”

The trends on presenting composite level net performance

During the second quarter of 2021, the United States Investment Performance Committee (USIPC), in conjunction with CFA Institute, conducted a survey of US firms claiming compliance with the Global Investment Performance Standards (GIPS^®) to learn about the methodologies and practices that firms are using to calculate and present net returns. The results of that survey in 2021 found that “…thirty-seven percent of survey respondents use actual fees for all composites, and an almost equal number (36%) use model fees for all composites. Twenty-two percent of survey respondents use actual fees or model fees, depending on the composite. A small number of respondents (4%) indicated that they do not calculate composite net returns.”

Now looking forward to 2024, in our recent September webinar, an interactive poll showed that 27% of respondents are using actual fees, 45% are using model fees or multiple model fees for all composites and 22% are using a mix of model and actual fees. 6% responded NA. Therefore, what we are seeing in today’s market is the expected evolution of net returns. There are firms still basing net returns on actual fees, but the trend is moving to model fees, and to an even greater extent, to presenting “multiple model fees”. Of the 45% of the market presenting model fees, 60% of that group have moved to show multiple model fees.

Watch this video clip from our webinar with panelists, Arin Stancil at Guardian, and Dena Hopkins, Confluence discussing this topic:

At the recent Annual GIPS Standards Conference, during the session devoted specifically to the SEC Marketing rule, there was a section on net returns, where the graphic below was shown:

Source: 28th Annual GIPS Standards Conference 2024, San Diego

The panel discussed the application of this presentation and stated that presenting multiple model fee examples was acceptable, as long as the highest fee was one of the models.

At Confluence, we firmly believe leveraging technology can empower GIPS^® Standards compliant firms to comply with the SEC Marketing Rule’s advertising performance requirements and especially the net of fees requirements.

Using the right technology can help firms achieve this. Our composites solution, Revolution Composites, provides firms with an unlimited number of return streams and allows net performance to be populated based on different fee schedules, which empowers firms to create the multiple model fee examples without any additional work. The solution sits within the best-in-class performance, risk and analytics Revolution platform as an optional module for easy integration. It provides user-friendly reporting to pull those performance streams and present them in the format desired with the proper disclosures and statistics.

Technology’s crucial role in compliance

As we stand at the crossroads of GIPS^® Standards compliant firms and the SEC Marketing Rule, the need for efficient, accurate and compliant reporting has never been more essential. By leveraging technology, firms can not only navigate the complexities of regulatory demands, but also pave the way for improved administration, streamlined processes and the seamless structuring of critical information.

There are many reasons to become GIPS^® Standards compliant, or to implement GIPS^® requirements as client demands and regulatory mandates amplify in the years ahead. GIPS^® compliant firms may be in a better position to meet the SEC Marketing Rule’s advertising performance requirements. To thrive in this shifting landscape, firms need to create meaningful composites that are essential in the fair presentation, consistency and comparability of performance over time and among firms.

Welcome to this First Anniversary edition of the RegTech Report. How things can change in just 12 months! From major new reporting frameworks, to the rise of AI and other technologies, to sustainability disclosure milestones, to impactful legal and political developments… investment firms have had to adjust constantly.

Along the way, we hope to have provided you with useful analysis: going beyond a parroting of recent events, to provide insights about what lies ahead three, six, 12 months down the road and beyond. We thank you for reading, and we look forward to continuing to help you address – and anticipate – your compliance and operational challenges.

In this edition, we focus on the biggest story of the year – the election of Donald Trump – and what it means for investment firms.

It’s no secret that the November 5th election of Donald Trump as President for a second term – buttressed by a Republican majority in both chambers of Congress – should bring major changes, including for regulation in the U.S. financial sector. How will this happen, and what should investment firms expect?

Reshaping the administrative state

Already during his first term, Trump adopted a deregulatory approach for federal agencies generally. For example by issuing an Executive Order requiring that agencies eliminate two regulations for every one they issue. At the time, the conservative think-tank The Heritage Foundation boasted that, within just his first year in office, Trump embraced two-thirds of its 334 policy recommendations (across many areas entailing the reduction of regulatory burden).

This time around, Trump could go much further. He has super-sized his two-for-one regulation cutting pledge, to ten-for-one. As for the Heritage Foundation, its blueprint for Trump’s second term, Project 2025, became so controversial that Trump himself claimed to be unaware of it. Aside from its well-known flashpoints – like abolishing the Department of Education, mass deportations of illegal immigrants, and criminalizing the viewing of pornography – Project 2025’s plans include the following for financial regulation:

• Abolishing FINRA, folding it into the SEC
• Abolishing the SEC’s rule on corporate climate change disclosures
• Prohibiting SEC staff (i.e., non-Commissioners) from initiating enforcement proceedings
• Placing a two-year time limit on the duration of SEC investigations
• At the CFTC, placing more decision-making power with its Commissioners
• Eliminating the CFTC’s federal position limits rule

That is but a small sampling of what could develop, once Trump takes office on January 20th, 2025. Another think-tank, created by Trump insiders upon his 2020 election defeat, is the America First Policy Institute (AFPI), reported to have prepared scores or even hundreds of Executive Orders ready for Trump’s signature. While less public than the Heritage Foundation about its specific policy prescriptions, AFPI is clear about its aim to “dismantle the administrative state”, and is now considered to be the more influential group driving Trump’s second term agenda.

Pending SEC regulation

SEC Chair Gary Gensler (who is also one of the five SEC Commissioners) has announced his resignation, and will depart the SEC on January 20th, 2025. Commissioner Jamie Lizárraga will step down as well, on January 17th, 2025. That paves the way for new Commissioners to be named by Trump, and a Republican majority slate of Commissioners at the SEC (no more than three of whom may be from the same party). Yet the way things stand now, when Trump takes office there will be only three SEC Commissioners (two Republicans and one Democrat) — three being the minimum number needed for a quorum. And, as has been pointed out, because SEC rules dictate that a reduced, three-member Commission can advance rules only with the support of all three such members, the Trump administration’s plans for the SEC could be delayed (until Trump goes through the process of appointing additional Commissioners with the consent of the US Senate). Meanwhile the new Chair, who will exercise significant power in setting the SEC’s rulemaking agenda, will be named by Trump as well, and could be one of the current sitting Republican-appointed Commissioners (Hester Peirce or Mark Uyeda, either of whom could also be named as a temporary acting Chair), or else an outside choice. Rob Stebbins, Dan Gallagher, Paul Atkins and Brad Bondi are among the various outside names being floated.

Regardless of who will fill the Chair, it was expected that the Trump administration upon taking over would recommend to the SEC, and to other independent agencies like the CFTC, that they postpone or withdraw their pending rules. (Several of the pending SEC rules — addressing for example ESG disclosures, outsourcing, and conflicts of interest in the use of AI and predictive data analytics — have been frequent targets of criticism from the incoming administration and industry groups.) But there may be limits on a President’s ability to force independent agencies to withdraw pending rules; and at the SEC, as mentioned above the limitations of having a three-member Commission could further delay such deregulatory plans.

Existing regulation

For existing rules, that have been already adopted through the notice and comment process and gone into effect, generally agencies may eliminate them only by again undertaking full notice and comment procedures, which can take several months or longer. The SEC may well go through these motions, to the extent it sees elimination of a rule as important enough. Meanwhile other types of agency rules, that have been adopted through more informal procedures (such as interpretations and guidance), can be withdrawn more easily, through the use of similar informal procedures.

Regulations that are in effect, but that have been more recently adopted, present another option for elimination. As we examined in our March edition, the Congressional Review Act (CRA) will permit a simple majority of each house of Congress to overturn them, with the President’s signature. Under CRA procedures, “recently” means that no more than 60 congressional in-session days have passed since a regulation was published or submitted to Congress (using the later date). Whenever a new Congress begins (as the Republican-majority 119th Congress will, on 3 January 2025), the CRA grants that new Congress another 60 legislative days to review those recent regulations (such new period beginning on the 15th legislative day of that new Congress).

When counting 60 congressional days in-session for the latter part of 2024, we find that any regulations submitted to Congress after approximately 1 August 2024 are subject to being repealed by simple majority votes in the next Congress. To see which regulations across all federal agencies are vulnerable, consult the handy CRA Window Exploratory Dashboard.

Note on the CRA’s 2024 lookback window

The exact date, after which a rule’s publication or delivery to Congress subjects it to being overturned, will depend on how many in-session days will elapse before the current 118th Congress ends (which will happen at the latest on 3 January 2025). Interestingly, “pro forma” legislative sessions that can last mere seconds, and by design are skipped by the vast majority of Congress, count as in-session days under the CRA’s complex provisions. Often used to keep Congress from technically being in recess, pro forma sessions have increased in recent years. (Most earlier estimates of the final 2024 date for CRA-proof regulations had not considered these pro-forma session days, and hence incorrectly predicted that date to be sometime in May instead of August.) Sarah Hay at GW’s Regulatory Studies Center has recently posted a superb analysis of how the key date should be determined.

As for the SEC, apart from purely technical prescriptions the following measures were issued by it after August 1st, exposing them to the possibility of elimination under the CRA:

• Form N-PORT and Form N-CEN Reporting; Guidance on Open-End Fund Liquidity Risk
• Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders
• Covered Clearing Agency Resilience and Recovery and Wind-Down Plans

Other tools

There are additional means for reversal of an agency’s prior measures, depending on the circumstances. For a final rule undergoing court challenges (like the SEC’s Rule 13f-2 requiring short position disclosures), a newly led agency that no longer supports the rule can retreat in its legal defense of it. For example by settling the case on preferred terms, or by refraining from appealing any negative court rulings.

For pending enforcement actions, the agency might simply choose to dismiss them. (As could happen with the SEC’s outstanding cases against dealers of crypto assets, which the agency currently views as “securities” - a view that may not survive beyond Gensler’s term as a Commissioner.)

For an excellent run-through of the various deregulatory devices that may come into play, see Gibson Dunn’s recent analysis.

Takeaways

In the absence of certainties about what exactly will unfold, investment firms can nevertheless expect some relief from the introduction of onerous new financial rules in the US, and possibly the end of some existing ones. (As markets in large measure cheer the election results, seeing the potential for business-friendly policies to drive more profits.)

Regulatory change in any direction requires monitoring, compliance adjustments and flexibility. From a competitive standpoint, successful back and middle office functions positioned to efficiently handle new regulations, are likewise able to quickly take advantage of what deregulation may offer their firm. In either scenario, adapting to change efficiently should be a key overriding strategy.

Moreover, as we have previously noted with respect to the SEC's Private Fund Adviser Rule that was subsequently vacated, investor demand for actionable information – data that will become more prevalent and useful as the relevant technologies continue to advance at a significant pace – should grow regardless of the regulatory environment. Firms that can tell investors more of what they want to know (and even what they don't know they want to know) are competitively positioned to attract and retain clients. This is a characteristic of the industry quite insulated from political or regulatory developments.

As for firms exposed to global markets, they should continue to encounter regulatory challenges, particularly in Europe where market fragmentation, continuing non-financial priorities and local regulatory imperatives demand robust and efficient compliance and operations teams. (EU influencers like Mario Draghi, in fact, readily acknowledge this state-of-affairs, and propose to remedy it with streamlined, pan-EU vehicles to encourage more investment. But any such relief will take years to implement, and of course confront the political priorities of 27 different Member States.)

A strategic, competitively oriented view, therefore, still calls for investment in efficient compliance processes, regulatory expertise, data gathering and analysis, and technology. For now that is about the only certainty firms can rely on, as a new force prepares to lead the US government and chart a new course.

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