Advisors Brace for More Exams in 2014; DOL ‘Game Changer’ on Horizon

While advisors anticipate — yet again — the arrival of fiduciary advice rules from the Securities and Exchange Commission and Department of Labor in the new year, they’ll also be bracing for more exams as well as watching how some proposed regs and bills play out. The DOL’s expected proposal requiring plans to project the amount of a participant’s retirement income is likely to be a “game changer” for advisors, one industry watcher says.

The SEC’s rule to put brokers under a fiduciary mandate isn’t expected to arrive until after DOL releases in August its reproposed rule to amend the definition of fiduciary under the Employee Retirement Income Security Act.

However, what advisors can expect from the SEC sooner in the year is a promise from the agency of more advisor exams. Neil Simon, vice president for government relations at the Investment Adviser Association in Washington, says that advisors can indeed expect that the SEC’s Office of Compliance Inspections and Examinations will zero in on more advisors in 2014 via “presence exams” and by “increased examiner productivity” — boosting “the potential for more enforcement cases against IAs.”

Indeed, OCIE chief Andrew Bowden said in October that the agency would take aim at the group of about 4,000 RIAs that have never been examined before. But Duane Thompson, senior policy analyst at fi360, doubts the agency can do much more on the exam front.

The SEC’s examiners “can incrementally increase their exam numbers by mov[ing] around their resources, but I don’t think they have a lot [of resources] to move around,” Thompson says. The agency can take advantage of presence exams, “which are exams where [SEC examiners] work from the office and request a lot of documentation from advisors instead of going onsite.” If the agency focuses “on the vast majority of advisors, the ones where the average is eight to 10 employees who mainly [do] passive investing, with no exotic [activities] where it won’t take as long to go through the books and records, they could bump up their [exam] numbers,” he concedes.  

But, adds Thompson: “Unless Congress gives the [agency] more money or a bill passes” to allow the SEC to collect user fees to fund advisor exams, “I don’t see how the [agency] can increase” the amount of exams.

Industry and consumer trade groups sent a letter in early December to all members of Congress urging them to support H.R. 1627, the Investment Adviser Examination Improvement Act of 2013, which is sponsored by Reps. Maxine Waters, D-Calif., and John Delaney, D-Md. The bill would authorize the SEC to collect an annual user fees from RIAs to increase the frequency of their exams.

Simon says that the late November vote in favor of user fee legislation by the SEC’s Investor Advisory Committee “should encourage new support for the Waters/Delaney bill on Capitol Hill” in the New Year. Other bills that passed the House but are unlikely to be taken up by the Senate in 2014 include H.R. 1062, which would require comprehensive cost-benefit analysis of SEC rulemaking; H.R. 2374, introduced by Rep. Ann Wagner, R-Mo., which would require the DOL to wait to repropose its fiduciary rule until 60 days after the SEC issues its fiduciary proposal; and H.R. 1105, which would narrow SEC registration requirements for advisors to private equity funds.

Regulations advisors will be watching include money-market mutual fund reform, which the SEC has projected it will adopt in October, as well as enhanced disclosures in marketing brochures of target-date funds.

DOL has said that a rule to require more disclosures on investments in TDFs will likely come in March.

Also coming from DOL in 2014 will be a proposed regulation requiring plan providers to project a participant’s retirement income based on their account balance, what Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath, says will be a “game changer” for plans and their advisors.