New Year Brings Regulatory Roulette for Advisors, BDs

New rules and new faces add to the uncertainty of which new compliance challenges will take hold in 2016

FINRA CEO Richard Ketchum, left, with Financial Services Institute CEO Dale Brown. Ketchum is retiring next year. FINRA CEO Richard Ketchum, left, with Financial Services Institute CEO Dale Brown. Ketchum is retiring next year.

While the expected release in the New Year of the Department of Labor’s rule to amend the definition of fiduciary will be top of mind for advisors and broker-dealers, other regulations –as well as new faces at the two regulators that oversee these industries — will add to their compliance challenges in 2016.

A few days before Christmas, staff at the Securities and Exchange Commission released their recommendations on ways the agency should update the accredited investor definition, and the SEC will still be toiling in 2016 on a recommendation to require third-party exams for advisors.

The third-party exam rule is already receiving pushback from the industry as well as current and former SEC officials. Former SEC Commissioner Troy Paredes challenged advisors in early December to speak up now to influence the rulemaking, while the agency’s former director of investment management, Norm Champ, warned such a rule would be costly for advisors.

DOL’s fiduciary rule survived the threat of riders being attached to the omnibus spending bill that would have effectively killed the rule, but legislative efforts remain in play to topple the rule in the New Year.

Meanwhile, SEC Chairwoman Mary Jo White has also vowed that the agency will release next year its own uniform fiduciary rule for brokers and advisors. But the addition of two new SEC commissioners in the New Year, Hester Peirce and Lisa Fairfax, throw further into question how quickly the agency could move on such a rule.

Don’t forget other forthcoming SEC rules, including mandatory succession plan rules for RIAs as well as more information that the SEC wants advisors to provide on their ADV forms.

The succession rules would require investment advisors to plan for market stress and other events that may prevent an advisor from serving clients – including addressing the risks of losing key personnel.

On the Form ADV, the SEC wants advisors to not only provide more information about their use of derivatives in separately managed accounts, but also about their branch office operations and their use of social media.

Advisors should continue to hone their cybersecurity policies and procedures as the SEC has commenced its second round of cyber exams.

The Financial Industry Regulatory Authority also filed late in 2015 for SEC approval its Rule 2273, which would require member BD firms to provide an educational communication in connection with member recruitment practices and account transfers.

FINRA states in the rule proposal that it believes that “former customers would benefit from receiving a concise, plain-English document that highlights the potential implications of transferring assets.”

The proposed educational communication, according to FINRA, “is intended to encourage former customers to make further inquiries of the transferring representative (and, if necessary, the customer’s current firm), to the extent that the customer considers the information important to his or her decision making.”

The self-regulatory organization for broker-dealers will also be getting a new leader in the New Year, as Richard Ketchum, FINRA’s chairman and CEO, announced earlier in 2015 that he would depart in the second half of 2016.

As to changes to the accredited investor definition, the SEC staff has proposed that the definition include investors with certain professional credentials including those who have passed the Series 7 or 65 exams, angel investors and others who have significant private investment experience, knowledgeable employees of private funds, and investors that pass an accredited investor qualifying exam. 

The SEC also recommends adding an “investments test” that would allow investors with a minimum amount invested to automatically qualify as an accredited investor, although the staff does not offer a specific amount. 

Other recommendations include leaving the current income ($200,000/year) and net worth ($1 million) tests in place but limiting total private placement investments to 10% of those thresholds; adding higher tests of income (e.g. $500,000/year) and net worth (e.g. $2.5 million) to permit unlimited investing; inflation adjusting all income and net worth tests in the future; and adding all entities that invest at least $5 million. 

Cipperman Compliance Services notes, for one, that the SEC staff changes reflect a “very practical approach” to modernizing the accredited investor definition, adding that the SEC “has considered real-world experience and balances the need for investor protection against the desire to ensure capital formation.”

But such changes to the definition aren’t without detractors, whom the agency will certainly hear from in 2016.

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