For Compliant Advisors, Known (and Unknowable) Unknowns

Keeping up with new rules — as well as old ones that just won’t go away — has become the bane of advisors’ and broker-dealers’ existence, with compliance and legal experts able to easily tick off a list of rules and laws that have been handed down over the years that drive them, well, berserk.

Lawmakers, as well as the myriad regulatory bodies like the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Department of Labor and the current presidential administration, are the culprits in creating an endless compliance chore list for advisors and BDs.

However, there are rules that industry officials argue are and will continue to be sorely needed to keep scams and other types of harm to investors at bay. Officials even cite the negative repercussions brought on by “rejected rules” that continue to plague the industry.

Jon Henschen, owner of the broker-dealer recruiting firm Henschen & Associates, likens the current regulatory environment to sentiments expressed by writer and theologian C.S. Lewis: “Those who torment us for our good will torment us without end.”

Fiduciary rules by DOL and the SEC — if they’re coming — rank high among regs that advisors and BDs should be watching as well as potential legislation to boost the number of advisor exams. But long-established rules that have faced changes over the years, like the SEC’s custody rule and its chief compliance officer rule issued back in 2004, rank high in importance as well.

Regulatory Milestones

While this year marks the 75th anniversaries of the Investment Company Act and the Investment Adviser Act, arguably two of the oldest rules that have stood the test of time, the impact of other more recent — as well as upcoming — rules have yet to be fully felt. Case in point: the DOL’s controversial rule to amend the definition of fiduciary under the 40-year-old Employee Retirement Income Security Act.

Brian Hamburger, CEO of MarketCounsel, opines that DOL’s rule will not have a “big impact” on investment advisors directly (broker-dealers, on the other hand, may feel the biggest brunt), and says that even if DOL issues a final rule, it won’t happen for “a while.”

Labor has said it wants a final fiduciary rule on the books by May 2016, but Hamburger argues it will be “incomplete regulation” without an SEC rule.

The “big question mark” that remains, Hamburger says, is, “will the SEC get involved” and issue its own fiduciary rule? “Will they finally take on their role?” he asks. “Everything that DOL is doing is really an effort to get around the fact that the SEC is not engaged in the [fiduciary] rulemaking that it should” under the authority given to the agency by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Hamburger argues that if the SEC had stepped up to the plate and enforced the Merrill Lynch Rule’s “solely incidental exemption,” the fiduciary quandary of today would not exist. “This rejected regulation and the [SEC's] lax interpretation of the term ‘solely incidental’ has really been the impetus for all of the confusion that’s become the rallying cry for a uniform fiduciary duty,” Hamburger says. “If the SEC had drawn the line and said, ‘No, broker-dealers, if you want to act as an advisor, you have to register as one,’ would we be where we are today? The answer is almost certainly no.”

Indeed, Dodd-Frank also celebrated a birthday this July. Five years ago, President Barack Obama signed the watershed financial reform legislation into law. It was also five years ago that DOL scrapped the original version of its fiduciary rulemaking due to fierce backlash from lawmakers, as well as the broker-dealer and insurance industries, and started again. The controversial redraft that’s still enduring a drubbing today has been five years in the making.

Duane Thompson, senior policy analyst at fi360, wonders if the “playing field” for investment advice will ever be level. “Investment advisors have been playing defense for decades while brokers and product sellers have adopted their business model but fought against the same high [fiduciary] standards,” he says. Dodd-Frank “gives the SEC authority to impose a level playing field by adopting a uniform fiduciary standard for retail advice by brokers and advisors, and the DOL’s rule of expanding the ERISA fiduciary standard would essentially do the same thing on the pension side.”

Adds Thompson: “These [fiduciary rules] are big stories, and will have a direct impact on all advice-givers, but right now we’re only in the fifth or sixth inning until the DOL and SEC adopt new rules.”

SEC Chairwoman Mary Jo White has stated publicly that she’s for developing a fiduciary rule that would be codified, principles-based and rooted in the Investment Adviser Act rule. But the fact that the SEC is losing two commissioners soon — one Democrat and one Republican — throws further doubt into how quickly the agency could move on its own fiduciary rulemaking.