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New Year Brings New Regulatory, Political Challenges

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Karl Rove, the former deputy chief of staff to former President George W. Bush, made a prescient remark at the MarketCounsel Summit in early December, just two months before the Iowa caucuses: presidential candidate Ted Cruz wins Iowa as well as Donald Trump supporters in the state.

Just a week after Rove’s remark, Cruz did indeed pull ahead of Trump in Iowa. Rove told the MarketCounsel attendees that the “large cast of [Republican] characters” will ensure that the GOP race for the White House “will take longer,” with the candidates not whittled down to “maybe three or four, or maybe two” until about March 14. Trump, he said, “won’t win Iowa.”

But both Rove and David Plouffe, President Barack Obama’s 2008 campaign manager, opined at the Summit, held in Miami, that Trump also will not be the Republican presidential nominee.

“Trump has hurt the Republican Party; it won’t be lasting because he won’t be the nominee,” Rove said. Plouffe agreed, stating that while Trump will “win some states,” he’s not going to be able “to consolidate” wins in a bunch of states.

Meanwhile, Democratic presidential candidate Hillary Clinton, Plouffe predicted, “wins everything,” with her “biggest hurdle” being winning over New Hampshire voters.

As to the health care exchange put in place by the Affordable Care Act, Plouffe noted that lawmakers, “whether they support or oppose” the ACA, “are tired of votes by Congress to get rid of the ACA.” Hopefully, “the debate will return to what’s working, and then there will be innovation in the states,” he said, adding that “Medicare expansion will be the next big thing.”

Both Plouffe and Rove also agreed that the next president has a gem in Rep. Paul Ryan, R-Wis., the newly christened House Speaker. Rove said Ryan would focus on restructuring entitlement programs like Social Security and Medicare, as “he has been thinking for years” about how to tackle the nation’s debt woes. “The next president ought to recognize they have a good thing there [with Ryan] and they can work with him.”

Added Plouffe: The nation “can finally get a long-term budget deal; I think he will be cognizant of that. He’s there to do big things.”

Exams, Exams, Fiduciary

Presidential politics wasn’t the only topic tackled at the MarketCounsel Summit. Other hotbed issues that will be clarified in the new year include the ongoing debate of what to do about the number of advisor exams, the upcoming third-party exam rule for advisors to be issued by the SEC, as well as the Department of Labor’s rule to redefine fiduciary under the Employee Retirement Income Security Act.

Andrew Wels, MarketCounsel’s chief regulatory counsel, said during the four-day Summit that the problem with advisor exams is not the “frequency,” rather “it’s the content” of the exams. “Routine exams are no longer routine; they go on for ages,” Wels said, adding that SEC examiners “are frequently not well versed with the [RIA] model.

The solution? “Better exams through the creation of our own self-regulatory organization that understands our industry,” Wels opined. The SRO, he said, should operate “within the constraints of the SEC’s umbrella.”

Said Wels: “We control our own destiny,” adding that “someone in the industry needs to take the lead and create the model” and present it to Congress. The “next Congress is ripe for that.”

Former SEC Inspector General David Kotz stated at the Summit that since RIAs have to explain their business even to the SEC examiners, the issue with advisor exams is “competence” of the examiners. The agency missed the Bernie Madoff Ponzi scheme due to lack of competence, he charged.

Kotz noted his concern that the SEC “lumps” advisors and brokers together, and that the agency is challenged to understand “what they do and how they do it; that’s a challenge in exams as well as rules and regulations.”

When it comes to exams, “redundancies and overlapping oversight is a big issue,” Kotz said. “An SEC exam is different from a FINRA exam; you have to make sure you have the right expertise in the entity you’re dealing with.”

Despite the fact that he backed a bill to require a self-regulatory organization to help boost the number of advisor exams, and then ultimately supported Rep. Maxine Waters’ bill that would have allowed the SEC to collect user fees to increase the number of advisor exams, former House Financial Services Committee Chairman Spencer Bachus, R-Ala., sees the current exam structure as sufficient. “I’m not sure that we need any more regulation,” Bachus said.

Bachus and Kotz agreed that the DOL is out of bounds by moving forward on a rule to amend the definition of fiduciary for retirement advice.

“From a statutory standpoint, the DOL has no jurisdiction” to regulate investment and retirement products by amending the definition of fiduciary under ERISA, Bachus told the MarketCounsel attendees. “The SEC is the primary securities regulator; they need to be more aggressive in defending their turf.”

Agreed Kotz: “That’s exactly right; I don’t know that DOL got that memo.”

As to the SEC working on a rule that would require advisors to receive a third-party exam, former SEC Commissioner Troy Paredes urged MarketCounsel attendees to get in on the discussion now.

A third-party exam rule for advisors “is an active discussion” at the SEC, Paredes warned. “These discussions [about such a rule] are taking place.”

SEC Chairwoman Mary Jo White, as well as the current director of the agency’s Investment Management Division, David Grim, have publicly said that a rule is being drafted, so this is “not just inside the beltway policy debates; this is real stuff and decisions get made and new rules get put into place,” Paredes said. “Do you want to be part of that discussion to inform us?” he asked, adding that he would have “benefited” from hearing more from advisors about their concerns.

Norm Champ, the former director of the SEC’s Investment Management Division, who sat on a panel with Paredes, reiterated his concerns about the agency’s plan to promulgate such a rule as it would be costly for advisors.

“What are [the third-party audit firms] going to examine?” Champ asked. “If they examine everything, that will be expensive for the advisor.” He stated that the 200 examiners at the agency who monitor broker-dealers should be shifted to advisor exams.

SEC Investor Advocate Rick Fleming noted at the Summit that while Congress has appropriated some more funds to the agency — and the agency is now using some of those funds to “take on a new crew of examiners” — he’s always supported the idea that the agency should be allowed to assess user fees on advisors to boost the frequency of exams.

“Quite a ways down” his list of how to boost advisor exams would be third-party exams, which he said the agency “will likely move on.”

If the agency does adopt such a proposal, Fleming said it should specifically list auditors’ duties as “objectively as possible so that we can assess their job,” and also require “asset verification” whether the advisor has custody or not. “After Madoff, SEC has ramped up asset verification, which is good,” Fleming said.

Third-party examiners should also have “some sort of regulatory or review structure over top of them,” he added, “because there is a conflict between the firm being audited and the auditor.”

— Read “Bills Introduced to Foil DOL Fiduciary Plan” on ThinkAdvisor.