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Regulation and Compliance > Federal Regulation > SEC

SEC to Mull Accredited Investors, Advisor Succession Plan Rules

By Melanie Waddell

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Securities and Exchange Commission Chairwoman Mary Jo White said Thursday that the agency will continue this year to consider whether the agency should “subject broker-dealers to a fiduciary standard” and stated that the agency will use funds appropriated under the ‘Cromnibus’ spending bill to hire additional examiners.

Speaking at the Investor Advisory Committee’s first meeting of the new year, White laid out “what lies ahead in 2015,” noting that the agency will also consider this year obtaining “sufficient funding” for investment advisor exams, enhancing the disclosure of risks in target date funds, and completing the SEC’s review of the “accredited investor” definition.

White also reiterated in her Thursday comments the measures SEC staff started developing in December that staff in the Division of Investment Management are developing recommendations for Commission rulemaking to address the “increasingly complex portfolio composition and operations of today’s asset management industry,” which includes requiring advisors to have succession plans.

Said White: Three of the core initiatives would modernize and enhance data reporting for both funds and investment advisors; require registered funds to have controls in place that identify and effectively manage the risks related to the composition of their portfolios, including liquidity and the use of derivatives in the portfolios; and require investment advisors to create transition plans to prepare for a major disruption in their business that could disable them from serving their clients.

The Department of Labor plans to release the redraft of its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act to the Office of Management and Budget for review any day now.

The agency plans to use the $150 million budget boost that it received under the Cromnibus spending bill that passed in December to hire an additional 72 examiners for investment advisors and investment companies in 2015.

The agency will dedicate $305 million of its budget to its Office of Compliance Inspections and Examinations in 2015. OCIE expects to add 105 examiners total in 2015.

Said White on Thursday: “While significantly more [funding] is needed, one positive note is that we will be able to use funds we were appropriated for 2015 to hire some additional examiners, which will help increase our exam coverage of investment advisors. Our 2016 budget request also prioritizes this area and more is needed.” The Cromnibus bill allocated $1.5 billion to the SEC, which is $150 million more than the agency’s fiscal 2014 enacted level but $200 million less than the $1.7 billion requested by Obama for 2016.

SEC Commissioner Luis Aguilar said in a recent speech that the SEC needs to pass new rules addressing target date fund disclosures, as such funds “do not contain guarantees.” He noted that in 2008, investors who invested in funds “with a 2010 target date found themselves facing average losses of 30%, just two years before their presumed retirement date. Some of these investors faced losses as high as 41%.”

Unfortunately, he continued, “these losses only grew in the following year. This experience should have served as a wake-up call that target date funds were not performing as advertised. Yet, as of today, the Commission has not enacted a single new rule dealing with target date fund disclosures.”

The need for the Commission to act “has taken on an added urgency in recent years, as investors have continued to invest in target date funds in record numbers,” Aguilar said.

— Check out Advisor Barred for Claiming Fund Was ‘SEC Approved’ on ThinkAdvisor.

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