At press time, the mid-term elections are upon us—which means there’s a good chance the House will flip to a Republican majority—and the Securities and Exchange Commission (SEC) is inching ever closer to finalizing its study on whether a fiduciary duty should be extended to brokers, handing the results to Congress, and launching into the rulemaking process. But what about the other rulemakings that will likely come out of the SEC next year?
While the industry has been focusing its efforts on shaping a rulemaking on fiduciary duty, what hasn’t gotten as much attention in the fiduciary debate is how the SEC will harmonize the rules for investment advisors and broker-dealers. Harmonization will indeed be part of the fiduciary study that the SEC hands to Congress in January, as the study requires the securities regulator to identify gaps and overlaps in the broker-dealer and investment advisor regulatory regimes. According to an SEC official who spoke with Investment Advisor, any “comprehensive harmonization” of advisor and BD rules would require a separate rulemaking that goes beyond just a fiduciary standard rulemaking.
While one aspect of the harmonization debate is fiduciary duty, another part delves into inspection and enforcement rules for advisors and BDs—and the ultimate decision of whether there should be an SRO for advisors. Ron Rhoades, director of research and chief compliance officer for Joseph Capital, says that even after the switching of close to 4,000 advisors from federal to state registration, without self-funding, “the SEC will always be behind the curve” in examining advisors. “I would hope Congress revisits self-funding for the SEC. If the SEC doesn’t eventually get self-funding, we’re going to have some type of SRO for advisors,” says Rhoades. Moreover, he points out that since FINRA is already examining a very huge percentage of advisors who are dual registrants, “the likelihood that any other SRO, or better yet professional regulatory organization, would be able to take on that role is slim.”
Rhoades says the advisory industry should watch the Consumer Financial Protection Bureau (CFPB) carefully, because the broad grant of authority that the CFPB has been given means that it could regulate “anything that the SEC is not regulating,” with some exceptions.
[Read more about the CFPB and its overseer, Elizabeth Warren.]