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Regulation and Compliance > Federal Regulation

Tougher Advisor Regulation Coming in New Year

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Regulatory enforcement “is going to significantly increase” under the incoming Biden administration, according to Daniel Suvor, an aide to Vice President-elect Kamala Harris during her time as California attorney general. “I don’t think that’s going out on a limb.”

Names being floated to replace Securities and Exchange Commission Chairman Jay Clayton under President-elect Joe Biden include Gary Gensler, former chairman of the Commodity Futures Trading Commission, and Preet Bharara, the U.S. attorney for the Southern District of New York under former President Barack Obama.

Clayton left the agency on Dec. 22.

Expect the Biden administration SEC chair “to be more in the vein” of former SEC Chair Mary Jo White, “with many expecting another former U.S. attorney” such as Bharara to be considered for the post, said Nicolas Morgan, a partner at the global defense firm Paul Hastings.

White’s “’broken windows’ philosophy stressed enforcement action even for minor transgressions, reflecting her background as a criminal prosecutor,” Morgan said.

By contrast, “Clayton’s emphasis on increasing market access to ‘Main Street’ investors reflected his background and priorities,” Morgan added.

The agency will also be replacing division heads that are leaving. Brett Redfearn, director of the SEC’s Division of Trading and Markets, will leave his post by year-end as will Stephanie Avakian, SEC enforcement chief. Dalia Blass, head of the agency’s Division of Investment Management, plans to exit the agency in January.

Clayton’s departure at year-end “leaves the SEC rudderless,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business. Clayton quitting now “signals to the incoming administration that they need to fill the job right away.”

SEC Commissioner Elad Roisman, a Republican, was named interim SEC chair.

During his nearly three and a half years as chair, Clayton advanced more than 65 final rules to date from the commission’s policy divisions and offices, chief among them Regulation Best Interest and the Customer Relationship Summary form, or Form CRS. Under Clayton’s watch, the agency also finalized on Tuesday its long-awaited advertising and marketing rules for advisors, allowing testimonials.

Clayton said on Oct. 19 that he was “cautiously satisfied” with Reg BI but noted that three months after its enforcement date he was noticing some troubling trends.

As expected, the securities regulator’s exam division plans to ramp up oversight of brokers’ compliance with Reg BI starting in January, including recommendations on rollovers.

Under the Biden administration, “I don’t expect the SEC to scrap Reg BI and start from scratch,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “I do expect [the SEC under Biden] to move relatively quickly to clarify the meaning of best interest, and to do so in a way that represents a clear enhancement over suitability, and to clarify how it determines whether policies and procedures mitigate conflicts of interest.”

The SEC will need work with the Financial Industry Regulatory Authority and the states, Roper added, “to evaluate what is, and is not, happening as firms implement Reg BI. Once they’ve had time to do that, I think there will be additional areas where action is needed to refine the rule, but those changes will need to be evidence-driven.”

Investment advisors and brokers, according to Morgan, can expect the Reg BI “seesaw to tilt back toward imposing a fiduciary standard on brokers whether through new rulemaking, enforcement actions that push the envelope on the current Reg BI standard, guidance from the staff, or all three.”

Labor’s Fiduciary Rule

The Labor Department finalized in mid-December its fiduciary prohibited transaction exemption to align with Reg BI — a rule that industry officials say will have a significant impact on rollover recommendations and advice to IRAs.

However, industry officials anticipate that the Biden administration will pull back the rule and toughen it.

After a quick review of the 295-page rule, IRA and tax specialist Ed Slott of Ed Slott & Co. said that the PTE is “generally following” Reg BI regarding rollover advice.

“The same standard would apply, meaning that advisors will have to show they have gone through a process when advising on rollover options and be able to document that analysis,” Slott explained.

“They can get paid for that advice but they must show they reviewed the benefits and drawbacks of each potential option and came up with recommendations that were in the client’s best interest,” he said.

Advisors, Slott continued, “need to be better educated on all facets of rollover options.”

Labor’s final rule “closely tracks the proposal, which we strongly opposed as too weak to protect retirement savers from conflicted investment advice. The same is true here,” Roper said. “Fixing this rule — and Reg BI — will be early priorities in the Biden administration.”

Fred Reish, partner at Faegre Drinker in Los Angeles, said Labor’s PTE, dubbed Improving Investment Advice for Workers & Retirees, likely won’t be effective before Biden’s inauguration.

The Biden administration will “pull back and study the new rule to determine if it is consistent with the administration’s positions,” said Reish, adding that the Labor Department under Biden “will revise the rule to make it more demanding.”

New Name for SEC Exam Division

The SEC announced in mid-December that its Office of Compliance Inspections and Examinations will be renamed the Division of Examinations.

In its 25 years since inception, OCIE has grown — in both number (over 1,000) and percentage (23%) of SEC employees — to represent the second largest office or division at the SEC, second in size only to the Division of Enforcement, the agency said.

The unit is primarily responsible for conducting risk-based exams of SEC registered entities, including, among others: more than 13,800 investment advisors; approximately 10,000 mutual funds and ETFs; more than 3,600 broker-dealers; and FINRA.

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