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3 Areas Regulators Are Targeting Now, According to Lawyers

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Welcome back to Human Capital! I’m Melanie Waddell in Washington. Industry attorneys recently highlighted three priorities for advisors and broker-dealers to brace for as the new year takes hold: Regulation Best Interest’s impending June 30 enforcement date, an ongoing Securities and Exchange Commission sweep of 403(b) sales to teachers, as well as regulations that are needed to implement the Setting Every Community Up for Retirement Enhancement Act of 2019, or the Secure Act.

The “next area of focus” for the Securities and Exchange Commission’s Retail Strategy Task Force, housed within the agency’s enforcement division, is sales of 403(b) plans to teachers, said James Lundy, partner in Faegre Drinker Biddle & Reath’s Chicago office, on the firm’s recent Inside the Beltway webcast.

(Faegre Drinker launched global operations Feb. 1. Faegre Drinker combines Faegre Baker Daniels, an international law firm, and Drinker Biddle & Reath, a full-service national law firm.)

As to the Secure Act, regulations and guidance are needed for some areas of the sweeping bill — namely for pooled employer plans, or PEPs, as well as annual lifetime income projections. But the release of these could be hampered by the November presidential election.

Keep scrolling to read more about these issues and Reg BI compliance.

Thanks for joining me for another year in which we’ll pull back the curtain on the people shaping the financial services regulatory landscape. You can reach me at [email protected], and follow me on Twitter at Think_MelanieW.

Don’t forget to listen in on the latest Human Capital podcast with Carlo di Florio, global chief services officer for ACA Compliance Group, as he details the importance of regtech for regulators. Click here.

The 403(b) plan sales sweep is the “next phase” of the SEC’s focus on Main Street issues, after the agency resolving “some matters” under the Share Class Selection Disclosure Initiative (SCSD), Lundy said.

SEC Chairman Jay Clayton said last year that the agency-wide Teachers Initiative was to be led, in part, by the enforcement division’s Retail Strategy Task Force, which has an “increased incentive in trying to bring cases in particular areas that are priorities for the commission,” according to Lundy.

Co-enforcement chief Stephanie Avakian detailed in November the agency’s probing of the administration of teacher retirement plans, another area “where there may be undisclosed conflicts of interest,” particularly regarding fees and lower-fee alternatives.

The focus: compensation and sales practices of third-party administrators of 403(b) plans as well as the practices of their affiliated advisors and broker-dealers, Avakian said. And digging into “how administrators and their affiliates choose and recommend investment options, how they are compensated.”

Other sweep documents request info “on compensation that the administrators received on referring specific investments, also gifts and any other types of non-monetary compensation received from administrators and firms that work in the space,” Lundy said.

While the 403(b) sweep won’t be “as coordinated” as the share class one, expect more to come, Lundy warned.

Registered investment advisors have been getting sweep letters from the SEC, and more will come, Lundy predicts. “More specifically, I believe that SEC enforcement will use the information that they obtain from the administrators in a similar way to how they leveraged information and data from clearing firms for the SCSD Initiative and certain follow-up efforts, including the revenue sharing sweep,” he said.

As for Reg BI, while the Financial Industry Regulatory Authority has stated that second-half 2020 BD compliance exams will not be “gotcha moments,” Sandra Dawn Grannum, partner in Faegre Drinker’s Litigation Group, said during the webcast that the regulator will expect “good-faith attempts” to comply with all four parts — care, disclosures, conflicts of interest and compliance.

In other words: BDs must show they’ve taken measures to ensure actions are in the best interest of clients (care); disclosed situations where a conflict may arise; and “possibly even” mitigated conflicts. If a BD doesn’t “have written supervisory procedures (compliance) in place to ensure your measures are being carried out, … you have failed to comply with Reg BI.”

As it stands now: There are “a lot of unanswered questions” about the new PEPs, or pooled employee plans, formerly known as open MEPs, or multiple employer plans, under the Secure Act, said Brad Campbell, a partner at Faegre Drinker in Washington. “We will probably see some PEPs coming to market very quickly.”

The Secure Act also requires annual lifetime income projections. The Labor Department has 12 months to come up with an interim final rule, added Campbell, the former former head of Labor’s Employee Benefits Security Administration. “That will be a challenge for Labor, [as] that’s a technically difficult regulation to write.”

Such regs “face regulatory agenda priorities as to what the Trump administration wants to finish,” Campbell continued. A change in administrations could throw a wrench into such regulatory priorities. “To the extent we’re waiting on regulations from Treasury, Labor or anywhere else, there’s a lot of uncertainty built into that, too.”

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