More On Legal & Compliancefrom The Advisor's Professional Library
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
Securities and Exchange Commission Chairwoman Mary Jo White said Monday that besides implementing a new technology tool for examiners, the agency’s priorities this year are completing money market fund reforms, final implementation of crowdfunding as well as further monitoring of Rule 506 private offerings.
In her speech titled “The SEC in 2014” before the 41st Annual Securities Regulation Institute in Coronado, Calif., White failed to include a rule to put brokers under a fiduciary mandate as one of the agency’s priorities this year.
However, Barbara Roper, director of investor protection for the Consumer Federation of America, believes the issue is still on the agency's radar. White "doesn’t suggest that these are her only priorities for rulemaking or even her top priorities," Roper told ThinkAdvisor in an email message.
Added Roper: "We recognize that there are a lot of issues demanding the commission’s time and attention, not least the still incomplete rulemakings to address root causes of the financial crisis," but "we have been assured that the staff is continuing to work on the economic analysis that will underlie any fiduciary rulemaking."
Neil Simon, vice president of government affairs for the Investment Adviser Association, agrees that a fiduciary rule "remains a goal of the SEC," but that "the timetable is uncertain."
A “critical priority” to complete in the “relatively near term,” White said, is completing money market fund reform.
As it stands now, the commission is considering two “significant proposals” for additional reform that were put out for comment last June: a floating net asset value for prime institutional money market funds — the type of fund that experienced problems during the financial crisis — and a proposal to require money market funds under certain circumstances to impose a liquidity fee and permit the imposition of redemption gates.
The latter is designed to stop a “run.” As White stated previously, these proposals could be adopted alone or together.
“We have received hundreds of letters on the proposals with a wide range of differing views that we are reviewing closely,” White said.
Also on the agency’s priority list is the final implementation of crowdfunding and an updated Regulation A. “I expect that the commission, after thorough consideration of all comments, will move expeditiously to finalize these rules,” White said.
In what White described as “the start of what promises to be a period of transformative change in capital formation,” she said that in 2013, according to the SEC’s estimates, capital raised in non-SEC-registered offerings totaled $1.6 trillion, with more than 65% raised in new and ongoing Rule 506 offerings. Meanwhile, public offerings raised $1.3 trillion.
“So the private offering markets already rival the public markets in terms of capital raised,” she said.
To this end, White noted the agencywide working group that has been formed to monitor offering practices and other developments in the Rule 506 market, and that she has also directed the staff to form similar working groups for both crowdfunding and the new Regulation A.
Another priority will be finalizing rules regarding asset-backed securities. “The financial crisis also revealed" how they "could create undue risks to market integrity and investors,” White said. “Shortly after the financial crisis, the Commission proposed a new set of disclosure rules for asset-backed securities, which have evolved with the Dodd-Frank Act. Finalizing these new disclosure rules remains an important priority for the Commission in 2014.”
On the technology front, White noted the newly developed National Exam Analytics Tool (NEAT), which enables examiners to access and systematically analyze “massive amounts of trading data from firms in a fraction of the time it has taken in years past.”
“In one recent exam, our exam team used NEAT to analyze in 36 hours literally 17 million transactions executed by one investment advisor,” she said.
In 2014, SEC examiners, White said, “will be using the NEAT analytics to identify signs of not only possible insider trading, but also front running, window dressing, improper allocations of investment opportunities and other kinds of misconduct.”
White also said that she anticipates the Commission’s rulemaking agenda in 2014 will consider the adoption of Regulation SCI, which stands for Systems Compliance and Integrity.
Regulation SCI, she said, “would put in place new, stricter requirements for the use of technology by exchanges, large alternative trading systems, clearing agencies and securities information processors.” Regulation SCI “can be — and should be — the market-side counterpart to the intermediary-focused Market Access Rule adopted by the commission in 2010 to better regulate how broker-dealers manage the technological and other risks associated with direct access to markets.”
Check out Never-Examined Advisors Top SEC’s 2014 Exam Priorities List on ThinkAdvisor.