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September 24, 2019 at 04:43 PM
Two Securities and Exchange Commission officials went toe to toe Tuesday on whether the agency’s advice-standards package waters down the fiduciary standard for investment advisors.
During an oversight hearing held by the House Financial Services Committee — in which the chairman and commissioners were present — Rep. Carolyn Maloney, D-N.Y, probed Commissioner Robert Jackson, a Democrat, on whether he believes the reinterpretation of the Investment Advisers Act of 1940, which was passed along with Reg BI, “weakens the advisor fiduciary standard and increases risks for retail investors.”
Jackson responded that he dissented on June 5 to passing the four-pronged advice-standards package.
“The reason is very straightforward: My own view is that the law in the United States should be clear, that when there’s a conflict between an ordinary American investor and their financial advisor, the investor comes first,” Jackson said. “I think we should be unambiguous in all that we do in our work. And the rules that we adopted, including the interpretation you just mentioned, had instead a muddled standard that has to do with a balance between the various interests.”
Maloney then asked: “How do we correct this?”
Jackson responded that Section 913 of the Dodd-Frank Act allows the SEC “to set a uniform and strong standard with respect to investment advice in this country. I continue to think that’s an approach that we should give more consideration to.”
Jackson said he looks forward to seeing “how the package we’ve adopted plays out in the marketplace and whether we actually need to be much stronger in this area.”
Chairman Jay Clayton defended the agency’s Regulation Best Interest and its accompanying advisor standards during a question-and-answer session with Rep. Bill Huizenga, R-Mich.
“One of my colleagues said that you watered down the fiduciary duty as you moved this [advice-standards] package forward. Is that true?” Huizenga asked Clayton.
“No. It’s not true,” Clayton responded. “On Regulation Best Interest, the obligations broker-dealers owe their retail clients — they have an overarching obligation that they can’t put their interests ahead of the clients.’ We have a clear disclosure obligation — they have to say how they make their money. We have a clear care obligation — you have to know your client. We have a conflict mitigation obligation.”
Advisor Exams
The SEC, Clayton said, used its 2019 funding from Congress to fill 100 new positions.
During fiscal 2018, the agency’s Office of Compliance Inspections and Examinations conducted more than 3,150 exams, an overall increase of 11% from fiscal 2017.
This includes a 17% coverage ratio for investment advisors — which increased 13% from fiscal 2017, even as the number of RIAs increased by approximately 5%, the SEC officials told lawmakers in their prepared testimony.
“Staff will continue to leverage data analysis to identify potentially problematic activities and firms as well as to determine how best to scope the examinations of those activities and firms,” the officials said.
New Committee
The commission is also working to form an Asset Management Advisory Committee.
“Over the last two decades, major trends in retirement funding, investment philosophies, technology and capital formation have driven changes that include increased assets, new products, new strategies and new challenges in the environment for investors and investment managers,” the SEC officials said.
For example, there are now over 13,000 SEC-registered investment advisors with over $84 trillion in assets under management, and over 8,000 of these investment advisors provide services to retail investors.
“The emergence of index investing and ETFs has changed the way many investors build their portfolios and helped spark new rounds of competition over fees,” the testimony states. “Increased globalization has also intertwined domestic and foreign markets and policy. Financial regulators and the public could benefit from thoughtful discussion among experts with diverse viewpoints on these issues, and the commission is well-positioned to host that discussion. An advisory committee could lend transparency, engagement and rigor to the public discourse on these issues.”
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