A fiduciary rule proposal by the Securities and Exchange Commission along with planned changes to the Labor Department’s fiduciary rule top the list of attention-getters for advisors and brokers in the new year, but other moves like a new cryptocurrency rule by the SEC and tougher cybersecurity exams (and enforcement actions) may also be on tap.
The SEC slated a fiduciary rulemaking as a short-term agenda item in the regulatory agenda that the agency filed with the Office of Management and Budget on Dec. 14. Such a rule had previously appeared as a long-term agenda item, but is now listed as an upcoming “proposed rule” item.
Also on the commission’s short-term agenda is a reproposal of rules for “plain vanilla” exchange-traded funds, while the agency’s long-term to-do list includes amending the advertising rule and expanding the definition of accredited investor.
SEC Chairman Jay Clayton “has spoken publicly about the need for the SEC to wade into the fiduciary waters,” said Todd Cipperman of Cipperman Compliance Services. “Expect a proposed rule” in 2018.
The Investment Adviser Association notes Clayton’s earlier public statements indicating that the agency’s agenda would be more streamlined to inform the public about “what the SEC actually intends — and realistically expects — to accomplish over the coming year.”
Indeed, Brian Graff, CEO of the American Retirement Association, says that with the Tax Cuts and Jobs Act now in place, the “focus will be returning” to the fiduciary rule.
But can the SEC and Labor successfully collaborate on a uniform fiduciary standard?
Like other industry officials, Brian Hamburger, CEO of MarketCounsel, and Dan Bernstein, MarketCounsel’s chief regulatory counsel, have their doubts.
“Uniform means the same. It does not mean similar,” the two attorneys jointly state.
“There will be pressure [on the SEC] to come up with a broker-dealer version of a fiduciary standard,” the two MarketCounsel attorneys say. “Watch for the emergence of the ‘best-interest standard,’ a term that is surprisingly confusing with the definition of the fiduciary standard but will not be bolstered by decades of common law.”
If the SEC addresses the fiduciary issue “by enforcing the limited broker-dealer exemption that has simply not been enforced over the decades, the DOL will be able to remove themselves from this initiative.”
Bob Plaze, partner in the Registered Funds Group at Proskauer in Washington, adds that “it’s not clear what successful collaboration means.” DOL and SEC, said Plaze, a former deputy director of the SEC’s Division of Investment Management, ”are operating under substantially different statutes, which results in limits on the degree of uniformity that can be achieved.”
Cipperman also sees more states adopting fiduciary rules. “Nevada has already adopted a uniform fiduciary standard” in the wake of Labor’s 18-month delay of the more onerous provisions of its fiduciary rule. Cipperman expects other states like California, New York and Connecticut to follow in 2018.
Other Focal Points
While existing “rules, regulations and risk mitigation measures will continue to consume” advisors’ resources in 2018, say Hamburger and Bernstein, the new year could also bring cybersecurity or anti-money laundering rules or interpretive guidance for advisors.
“Cybersecurity is clearly the technology hot issue,” the MarketCounsel attorneys said. “A big reason for that is cybersecurity is all-encompassing. It impacts an investment advisor’s business continuity planning, data security, red flags, identity theft protection and privacy policies.”
While the SEC, the Financial Industry Regulatory Authority and state regulators “will want to see what investment advisors are doing about their cybersecurity, it is even more important to the firms, themselves, to address it for reputational, liability and business reasons,” Hamburger and Bernstein said.
With the release in late January of the SEC’s Office of Compliance Inspections and Examinations’ annual priorities list, “look for continued focus on disclosures and fiduciary advice regarding conflicts of interest,” Bernstein and Hamburger added. “This is especially true where the firm recommends any investment where it or an affiliate has a proprietary interest.”
Also on tap, “advisors will be complying with new custody guidance regarding standing letters of authorization,” or SLOA.
“Many of these advisors will now have to disclose that they have custody of client assets for the first time,” Hamburger and Bernstein said. “Those disclosures are in addition to a significant revision to ADV Part 1 that requires advisors to provide a lot more information about the assets that they manage.”
Todd Cipperman sees the SEC proposing a “rewrite” of the custody rule in 2018. “The custody rule has the right intent, but the rule itself is too open to interpretation and questions (see multiple FAQs),” Cipperman said.
The SEC’s plans to amend the Advertising Rule (Rule 206(4)-1) under the Investment Advisers Act “to enhance marketing communications and practices by investment advisors” is an “important” change that IAA says it has long advocated for.
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