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New Agenda Takes Hold in Washington

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What You Need to Know

  • New regulatory agency leaders mean new rules for advisors and broker-dealers to watch for.
  • In Reg BI exams, the SEC will evaluate BD processes for compliance and alterations made to product offerings.
  • RIAs will have 18 months to come into compliance with new ad rule.

A new administration as well as new leaders at the helm of regulatory agencies and congressional committees sets up a slew of activity for advisors and broker-dealers to watch in the new year.

Republican SEC Commissioner Hester Peirce pointed out in early March at the Investment Adviser Association’s virtual compliance conference, that President Joe Biden’s pick to be the new SEC chair, Gary Gensler, “will come in and will be thinking about the agenda he wants to set and where priorities fall.”

During Gensler’s nomination hearing before the Senate Banking Committee on March 2, Senators’ questions seemed to indicate his first priority should be addressing the Reddit GameStop short squeeze. The agency’s controversial Regulation Best Interest and its accompanying advice standards package, including Form CRS, were not discussed.

Gensler — a former chair of the Commodity Futures Trading Commission who’s a professor of blockchain, digital currency, financial technology and public policy at the Massachusetts Institute of Technology — laid out to the senators the steps he’d mull to address the recent market volatility related to the GameStop Reddit squeeze.

He also addressed his approach to regulating cryptocurrencies. Gensler told the senators, these products “have brought new thinking to payments and financial inclusion, but they’ve also raised new issues of investor protection that we still need to attend to.”

If confirmed, Gensler said he’d “work with fellow commissioners to both promote the new innovation but also at the core, ensure for investor protection.”

In Peirce’s mind, the SEC should “wait” before making “major changes” to Reg BI and the advice standards package, she opined during the IAA event. The SEC “should always be open to rethinking rules; that’s never a territory we shouldn’t be willing to enter,” Peirce said.

At the same time, Reg BI and the standards of conduct package is “a very new rule set; there was a lot of work done during the implementation. … It makes sense to me to see how this all plays out and then if we conclude there’s things that needs to be changed or clarified or eliminated … then we can come back to do that.”

A new SEC chair, Peirce continued, also will “want to see how [the package] plays out.” Reg BI “gives [the SEC] new abilities to bring cases that would have been harder to bring in the past. So I’m optimistic.”

As to Form CRS, Peirce conceded that “it is so dense, and some of them are not very inviting to read.” Often, she said, a “non-paper based digital message” is more effective. “It’s hard to get all this information into such a short form … I’m open to reconsideration on Form CRS.”

Administration and The Hill

Sen. Sherrod Brown, D-Ohio, taking the helm as the new chairman of the Senate Banking Committee means “much more legislative activity” coming out of that committee than there was under former Republican Chairman Mike Crapo, R-Idaho, Neil Simon, vice president of government affairs for IAA, said during the group’s virtual compliance event. House Financial Services Committee bills “went to die” under Crapo, Simon said.

Rep. Maxine Waters, D-Calif., maintains her spot as chairwoman of the House Financial Services Committee. Simon said he expects that committee’s newly created Diversity and Inclusion Subcommittee, which was created last year, “may focus on the asset management industry sometime in this Congress.”

With a 50-50 Senate, added Langston Emerson, a partner at Mindset DC — a bipartisan public policy firm — it will be “very difficult” to get significant legislation passed.

As a result, “there will be a large focus [by both chambers] on urging and pressuring the Biden administration to do rulemaking from a unilateral perspective,” Emerson said, as well as “a push and pressure on the [regulatory] agencies to do more.”

SEC Exam Priorities — Before Gensler

The SEC’s Division of Examinations released in early March its exam priorities for 2021 — with a compliance with Reg BI, Form CRS and whether RIAs have fulfilled their fiduciary duties of care and loyalties as the top issues being probed.

Amy Lynch, president of FrontLine Compliance, stated in an alert that “it’s important to note that the [2021 exam] Letter was issued prior to the new Chair’s arrival to the Commission.” Once Gensler “is in place (assuming official confirmation) the list of priorities for exams may very well change.”

The SEC noted in its letter that the scope of Reg BI exams also will be expanded. They will focus on whether BDs are making recommendations that they have a reasonable basis to believe are in customers’ best interests and evaluating BD processes for compliance and alterations made to product offerings.

John Polise, associate director of the SEC’s National Broker-Dealer and Exchange Program within the exam division, warned in early March during a webcast held by the Securities Industry and Financial Markets Association that the agency has moved beyond the Phase 1 “good faith effort” Reg BI exam cycle.

That said, the agency is “not looking to do gotcha exams or make enforcement referrals per se,” Polise said. “We’re still understanding that the rule is complicated, that there are myriad ways for individual firms to address the four core obligations” in Reg BI.

Reg BI “is a serious obligation,” Polise added. “In our good-faith exams we saw very good efforts and attempts by people to comply with the rule but there were some areas that could certainly be improved. Would they rise to the level of enforcement referrals? Probably not — more like deficiency letters to encourage people to take a more aggressive approach towards some of those requirements.”

Other exam priorities will be Libor, anti-money laundering, RIAs’ compliance programs, reviews of business continuity and disaster plans, as well as fintech and digital assets.

The exam division said that its coverage of RIAs in 2020, a year in which the RIA population continued to increase “and the pandemic necessitated a mid-year shift to remote examining,” was 15%.

The SEC completed 2,952 exams in fiscal 2020, a 4.4% decrease from fiscal 2019.

The growth of the advisory industry “continues to escalate, and certainly the complexity does too,” said Pete Driscoll, head of the division, said during the IAA compliance event.

The exam division is “hoping for 15% exam coverage of advisors,” as examiners were able to achieve in 2020, “but it’s going to be tough without additional resources,” he added.

Driscoll noted the “nutty year” so far with COVID, market volatility and meme stocks. “There’s just a lot of areas where we have to pivot from a cause perspective.”

The SEC noted in releasing its 2021 exam priorities that in the last five years, the number of RIAs the SEC oversees increased to more than 13,900 from about 12,000, and assets under management of RIAs increased to $97 trillion from approximately $67 trillion.

SEC Ad Rule

The SEC’s final rule on RIA advertising and marketing practices was published in the Federal Register on March 5 — setting in motion a May 4 effective date. RIAs have 18 months to come into compliance with the new rule.

The SEC passed the ad rule changes in late December. The rule allows advisors to use testimonials and endorsements, which include traditional referral and solicitation activity, subject to certain conditions.

The amendments create a merged rule that will replace both the current advertising and cash solicitation rules.

Karen Barr, president and CEO of the Investment Adviser Association, told IA in an email that publication “means the rule won’t be delayed for further review, and investment advisors now have a firm compliance deadline of Nov. 4, 2022,” with 18 months to modernize their marketing and advertising programs.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].

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