More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
As we close the books on 2012 and move into 2013, a number of significant issues are looming that will shape financial planners, their practices and the profession in the year to come. Perhaps the most apparent issue is the one that generated the most intensity in 2012 yet was never resoloved: the ongoing debates regarding the implementation of a uniform fiduciary standard for financial advisors, and which regulator will be responsible for increasing the oversight of investment advisors.
These issues—under Dodd-Frank Sections 913 and 914—will become hot topics again in 2013, as the SEC has committed to moving both toward a resolution, and the Department of Labor is also anticipated to (re-)release its own new fiduciary rules for 2013. This will be an intense year for financial advisor regulation.
Beyond what's on the regulatory horizon, though, two other significant issues loom for 2013. The first is a wave of change in the software and technology that advisors use, as tablets are rapidly becoming so mainstream that already the majority of advisors are using one... and soon the majority of all Americans will be, too. The bad news is that means a great deal of pressure is coming for advisors to improve their software, systems, and practices to accommodate the use of tablet computers. The good news is that this in turn may lead not only to dramatic improvements in the efficiency of the office and the experience for clients, but also that a wider base of tablet users attracts more software developers and providers to innovate and create even more new solutions and improvements.
The final issue for 2013—one that may well turn out to be both the biggest and the one for which advisors are least prepared—is the establishment later this year of health insurance exchanges and the need for clients to choose what health insurance they will purchase for 2014, or pay a penalty.
The sheer numbers involved in implementation of the Patient Protection and Affordable Care Act (PPACA), popularly known as Obamacare, are daunting and almost overwhelming, as there are nearly 50 million uninsured Americans who must by the end of the year go through a process to purchase health insurance. They must also do so from a series of state insurance exchanges, or ones run in the state by the federal government, that don't even exist yet!
I suspect we will find that when the books are closed on 2013 a year from now, we'll be stunned by the volume of work that will have been done guiding clients through this health insurance transition period.
In this series of blogs we’ll take a deep dive into each of these three issues. In this first post, we’ll focus on the fiduciary and SRO issues emanating Dodd-Frank.
The SEC’s Fiduciary Rulemaking
2013 is increasingly shaping up to be a major and possibly deciding year for the ongoing debates regarding the application of a uniform fiduciary standard on financial advisors (pursuant to Section 913 of the Dodd-Frank legislation) along with a potential change in the regulatory oversight for investment advisors (the so-called "SRO debate") for the purposes of increasing the frequency of RIA exams (under Section 914 of Dodd-Frank). The battle lines for the issues have largely been drawn at this point, so it's more a matter of moving forward with implementing actual rules.
Regarding a uniform fiduciary standard, the SEC's Section 913 study has been out for two years now, which did recommend that the SEC should move forward with rulemaking. The challenge, however, has been determining exactly how this uniform fiduciary standard should be written (do we need to write a new set of rules to define fiduciary in this context? Can we apply the fiduciary duty as defined by statute and case law under the Investment Advisers Act of 1940?), as well as how widely it should apply (to all registered representatives and investment adviser representatives, or some subset?).
Notably, Section 913(g)(1) of Dodd-Frank does stipulate that the uniform fiduciary standard should be "no less stringer than the standard applicable to investment advisers", but on the other hand that same section of the legislation also directed the new fiduciary rule to be as business-model neutral as possible. Furthermore, it reads that "the receipt of compensation based on commission or fees shall not, in and of itself, be considered a violation of such standard applied to a broker, dealer, or investment adviser."
This looming question of how to craft an appropriate fiduciary standard that meets all these requirements has been, to say the least, a sticky issue, and many have suggested that the SEC has been dragging its feet; nonetheless, the SEC has indicated recently in its 2012 Financial Report that it still intends to move forward with a fiduciary rulemaking in 2013.
The DOL’s Fiduciary Rulemaking
The landscape for a uniform fiduciary standard will be further colored in 2013 by a parallel proposal for fiduciary rules from the Department of Labor under Phyllis Borzi; after issuing an initial version of proposed fiduciary regulations last year, which was met with sharp criticism from many segments of the industry, the DOL took back its proposed rule for revisions. Nonetheless, the DOL has still indicated that it intends to issue another version of the rules in 2013, and to implement them.
The DOL's fiduciary rules are significant for two reasons. First, because of their own wide scope, potentially applying a broad and deep fiduciary standard not only to all interactions with employer retirement plans, but also to advisors who consult regarding IRA rollovers of qualified plan dollars. Second, because if the DOL moves first with rules that are actually implemented, they will likely influence and could even become the basis for the SEC's own subsequent fiduciary rules, especially given the partially overlapping jurisdictions (especially with respect to advisors working with IRA rollovers). In fact, if the DOL and SEC both issue fiduciary rules that are different, "harmonizing the fiduciary standard(s)" may become the next major regulatory issue for 2014 and beyond.
An SRO for RIAs
In parallel to the discussions of the fiduciary standard, expect to see a lot more activity regarding how to increase oversight of investment advisors in 2013. The issue was nearly decided in 2012 with proposed legislation from Congressman Spencer Baucus, which would have directed the SEC to hand over oversight of investment advisors to a self-regulatory organization (for which FINRA was the SRO-apparent), but the legislation was fought back by RIAs and the Financial Planning Coalition. A good part of their argument was research contained in a study commissioned by the Coalition with Boston Consulting Group that found FINRA oversight would drastically increase the cost of compliance for advisors to the tune of more than $50,000 per advisor. By contrast, increased oversight from the SEC was projected to be only about half that cost, and associated proposals suggested that this cost could be paid to the SEC by the advisory firms themselves in the form of a user fee.
In 2013, the Baucus legislation itself may not return—in part because Congressman Jeb Hensarling is taking over for Baucus as chair of the House Financial Services committee due to the Republican Party’s self-imposed term limits—but the pressure is still on the SEC to come to a conclusion on this issue. Notably, some form of increased oversight is likely for RIAs no matter what—that outcome appears unavoidable at this point—but the questions of which organization will provide that oversight, and what the costs will be, are still very much up in the air.
The first major steps to anticipate in early 2013: a new proposed fiduciary rule from the Department of Labor, and some cost-benefit analyses from the SEC that are viewed as necessary before it can proceed to a resolution for the issues on its plate. The cost-benefit analyses (CBAs) are a key step because whichever side "loses" the debate will likely challenge the SEC's rule, so the SEC is eager to get its ducks in a row with a defensible position before moving forward.
Look for the remaing posts in this series on AdvisorOne.
For additional reporting on what 2013 will bring for the economy, the markets and advisors, please visit AdvisorOne's Outlook 2013 home page.