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Mary Jo White's Swan Songs Off Key, Critics Say

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Several SEC rulemakings are up in the air as Mary Jo White’s term as head of the agency nears its end.

Most notably, of course, is a uniform fiduciary rulemaking for advisors and brokers. While White has said that the agency is mulling SEC staff recommendations on a fiduciary rulemaking, she’s acknowledged that such a rulemaking is a ways off.

But other rules nearer to completion are drawing complaints from the industry — specifically a proposal to require that advisors receive third-party exams as well as another requiring them to come up with business continuity and succession plans. (Former SEC Investment Management Director Norm Champ told me recently that White may get a third-party audit proposal out before the Presidential election).

White has been a vocal supporter of a uniform fiduciary standard, and has been pushing for such a rule for years. But some industry observers believe the agency will never finish its own rule, despite the Department of Labor’s success in doing so.

With a new president traditionally comes a new SEC chair and this election cycle, two new commissioners as well. Ron Rhoades, the financial planning program director at Western Kentucky University, said in September that SEC chairs customarily resign when a new presidential administration comes in. A new SEC chair “will bring in a new staff, and I hope that in doing that we’ll have some renewed energy to go after a fiduciary rule,” said Rhoades, who spoke on a panel at the Financial Planning Association’s national conference in Baltimore.

But even then, Rhoades continued, “it will take a very strong SEC chair to take action. […] I think we’re a couple years away, at best,” from seeing an SEC fiduciary standard.

The two new commissioners that have yet to be confirmed by the Senate are Mercatus Center Fellow Hester Peirce, along with George Washington University law professor Lisa Fairfax (see sidebar, page 44).

Fiduciary Will ‘Play Out a Bit Differently’

While the industry anxiously awaits an SEC fiduciary rule, Timothy Hauser, chief operating officer of DOL’s Employee Benefits Security Administration, said at the FPA event that the SEC and DOL “could define fiduciary to mean exactly the same thing, and it would have very different consequences,” as securities laws are about disclosure and are “fraud based,” while the Employee Retirement Income Security Act and the tax code are much more targeted at mitigating conflicts. With the SEC and DOL having different statutory and regulatory mandates, “things will play out a bit differently in these two contexts,” he said.

Indeed, DOL’s fiduciary rule, “by itself,” said Michael Wong, a senior equity analyst at Morningstar, “has the power to reshape many practices and products in the financial sector, and deserves all of the attention that it’s receiving, even if an SEC rule is never made.”

While some in the industry hold out hopes that the SEC will move on a fiduciary rule, “we’re already seeing wealth management firms taking steps as if one will eventually be made,” Wong said.

For instance, “in the last several quarters, some firms have decided to use load-waived A-shares or institutional shares in their taxable account advisory programs. Pruning of financial product shelves at the wealth management firms will not likely be restricted to just the products that are used in retirement accounts, but also the products available to taxable accounts,” Wong added.

Third-Party Audits

SEC Chairwoman White is seen as pressing ahead this year with plans to require advisors to receive a third-party audit as well as enhanced liquidity risk measures for mutual funds and ETFs.

“My guess is that before the election, SEC Chair Mary Jo White may try to adopt the liquidity rules for mutual funds proposed in 2015 and could propose that advisors be required to hire third-party examiners,” Champ, a partner in Kirkland & Ellis’ private funds group, told me in a recent interview.

White said early last December that the agency would propose a new rule and amendments to some proposed forms related to the use of derivatives by registered investment companies, like exchange-traded funds, and business development companies. The agency followed through with that proposal, which would limit funds’ use of derivatives and require them to put risk management measures in place, on Dec. 11.

The two SEC commissioners, Michael Piwowar and Kara Stein, are said not to be fans of a third-party audit rule for advisors.

Champ, too, has criticized the SEC’s plan to require advisors to get third-party audits, stating such audits will be costly for advisors and their clients and could have unintended consequences.

Champ sees White, under pressure by the Financial Stability Oversight Council, pushing ahead in the coming months with measures in the agency’s five-pronged agenda to modernize and enhance regulatory safeguards for the asset management industry, and argued that a third-party audit rule is really a sixth prong.

The agency moved ahead on two of the measures by adopting final amendments on Aug. 26 to Form ADV, as well as proposing in late June that RIAs adopt and implement written business continuity and succession plans.

The three remaining initiatives on White’s agenda have been formally proposed and await final action: enhancing management of liquidity risks by mutual funds; a new framework for regulating the use of derivatives by registered investment companies; and requiring all advisors to create transition plans for a major disruption in business.

No formal rule proposal has been introduced as yet regarding the fifth initiative — mandating annual stress tests by large funds and large advisors.

Meanwhile, industry trade groups are taking issue with the SEC’s plan to require RIAs to adopt and implement written business continuity and succession plans. The SEC’s plan, floated in late June and out for comment, is designed to ensure that advisors have plans in place to address operational and other risks — like a natural disaster, cyberattack, technology failures, departure of key personnel — that would present a “significant disruption” in the advisor’s operations.

The Investment Adviser Association balked that the SEC rule amounts to a new anti-fraud rule. The SEC’s intent was to make the rule proposal principles-based, IAA said, “but the proposal and release include a level of detail that could be construed as prescriptive, causing thousands of smaller investment advisors to formulate plans that aren’t suited to their business models in order to avoid fraud charges in the event their plans are found to be deficient in some way.”

IAA argued in a Sept. 6 letter to the SEC that the agency can accomplish “the great majority” of what it wants through additional guidance via its Compliance Program Rule.

“While we agree that advisors should have robust BCPs, we strongly believe that business continuity — and to a limited extent, transition planning — is more suitably addressed as an interpretation of or guidance under the existing Compliance Program Rule framework than as a separate, new anti-fraud rule,” IAA told the SEC.

“First and foremost, business continuity and transition planning requires advisors to take current action in the face of varied and unknown potential events. There is no such thing as a perfect BCP, and imperfections — likely assessed in hindsight — may not reflect fraudulent or deceptive conduct, but rather decisions made in good faith that were rendered inadequate by unforeseen events,” IAA said.


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