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Regulation and Compliance > Federal Regulation > SEC

SEC ‘Pushing’ for Fiduciary Rule, Clayton Says

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Securities and Exchange Commission Chairman Jay Clayton told Senate lawmakers Tuesday that harmonizing a fiduciary rule with the Labor Department is a top priority for him and laid out four steps the agency plans to take on such a harmonized rule.

“Are you working with the DOL to harmonize that fiduciary rule so that people don’t get ping-ponged back and forth between two rules?” Sen. Jon Tester, D-Mont., asked Clayton during a Senate Banking Committee oversight hearing Tuesday.

“Yes,” Clayton responded.

“You anticipate that harmonized rule will be out when?” Tester probed further.

While not specifying a timeframe, Clayton responded: “This is a priority for me. Everything can’t be a priority for me … we’re pushing this one.”

Sen. Tim Scott, R-S.C., said during the hearing that Labor’s fiduciary rule “has had a negative impact on many Americans. Restricting access to professionals in the financial industry has a negative impact on the resources available to the average American for retirement. The last thing we need to do at this point is to find ways to get experts out of the households, which is the unintended consequence of the fiduciary rule, from my perspective.”

Scott said that he was “pleased” that Labor is seeking to delay the rule’s January 2018 compliance date by 18 months.

He then queried Clayton on the progress of the SEC’s coordination with Labor and the delay.

Clayton responded that he thanked Labor Secretary Alexander Acosta for “reaching out to say we [the SEC and DOL] should work together on this” harmonized fiduciary rule. “And I do believe we should work together.”

The commission, he continued, is now reviewing the request for comment the agency is seeking regarding “updated views from investors and industry participants on the effects of the DOL rule and what we should do going forward in terms of standards of conduct,” Clayton said.

He then detailed the four aspects of “any joint rulemaking” that’s put forth by the SEC, Labor and other regulators, including state insurance regulators.

Investors must have choice, Clayton said, so “they aren’t pushed into a narrow set of circumstances as a result of whatever steps we take.”

Second, that there’s clarity so “that investors know what type of person they’re dealing with and they know the obligations owed to them.”

Third, that there is consistency. “If you have two different types of accounts but you’re facing the same person — a retirement account and a non-retirement account — there ought to be consistency with respect to those accounts.”

Finally, that the SEC, Labor and state regulators “are coordinated in how we approach this” fiduciary regulation, Clayton said.

EDGAR Cyber Breach and the Reserve Fund

In the nearly two-hour long hearing — in which lawmakers also grilled Clayton on the recent cyber hack of the agency’s corporate filing system, EDGAR — Clayton also said that he’s “worried” about the amount of retail fraud.

Sen. Mike Crapo, R-Idaho, chairman of the Senate Banking Committee, said in his opening remarks that he was “disturbed to learn that the SEC suffered a cyber breach of its EDGAR system in 2016, but did not notify the public, or even all of its commissioners, until it was discovered during your recent review.”

Late Monday, the SEC announced two new initiatives: the creation of a Cyber Unit that will focus on targeting cyber-related misconduct as well as a Retail Strategy Task Force that will implement initiatives that directly affect retail investors.

The Retail Strategy Task Force is charged with developing proactive, targeted initiatives to identify misconduct affecting retail investors. 

The retail task force’s mission will be to leverage data analytics and technology to identify “large-scale misconduct” affecting retail investors and will include participation from employees in the agency’s enforcement, National Exam Program as well as the Office of Investor Education and Advocacy.

Clayton noted during his testimony that the exact month of the 2016 hack of EDGAR is still unknown, but that members of the agency’s enforcement division along with the agency’s Office of General Counsel and the Office of the Inspector General are conducting an investigation of the hack.

“We believe the 2016 intrusion involved the exploitation of a defect in custom software in the EDGAR system,” Clayton said, adding that “the more custom the software, the more likely for it to be vulnerable.”

Clayton said that he has “formally requested that the OIG begin a review into what led to the intrusion, the scope of nonpublic information compromised and our efforts in response,” and has asked OIG to “provide recommendations for how the SEC should remediate any related system or control deficiencies.”

Sen. Jack Reed, D-R.I., urged Clayton to fight to ensure that the $50 million reserve fund that supplies the agency’s IT funds isn’t eliminated by the Trump administration.

“I would urge you to … resist any attempts” to take away this Reserve Fund, Reed said to Clayton. “The administration has proposed that in 2019, the fund be eliminated. Given the current situation with cybersecurity, you have to have the money,” Reed said, noting that the agency can set aside up to $100 million of its registration fees to fund the reserve fund.

“I think we need to spend more money” on IT, Clayton responded. “When I got to the commission, I made some assessments. We went with a flat budget for the next fiscal year; I will not be asking for a flat budget for fiscal year ’19. We’re going to need more money in the area of cybersecurity and IT generally. I intend to ask for it.”

— Check out State-Registered Advisors Need More Cyber Prep on ThinkAdvisor.


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