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Melanie Waddell

Regulation and Compliance > Federal Regulation > SEC

7 Big Rules on the SEC's 2023 To-Do List

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What You Need to Know

  • Advisor custody regs are a priority this year, along with a few controversial rules.
  • The SEC is heavily focused on advisors and funds this year, compliance consultant Amy Lynch notes.

The Securities and Exchange Commission plans to propose and finalize some big rules in 2023 — some of which are very unpopular with advisors.

The agency’s just-released regulatory flexibility agenda sets out the securities regulator’s planned rulemaking schedule for the year. However, reg flex agendas are placeholders and the SEC’s rulemaking agenda can change throughout the year.

For instance, proposals on the fund fee disclosure and reform rule — which will likely rein in 12b-1 fees — along with the custody rule were expected last year but have been pushed to 2023.

“The rulemaking focus on advisers and funds is the common theme” for the SEC this year, notes Amy Lynch, president and founder of FrontLine Compliance. “It will be a busy year for adviser compliance.”

Despite pushback, the agency plans to move ahead with its rule to prohibit RIAs from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.

In releasing the agenda on Jan. 4, SEC Chairman Gary Gensler stated that he supports the agency’s short- and long-term agenda “as it reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets.”

Gensler added: “Our ability to meet our mission depends on having an up-to-date rulebook —consistent with our mandate from Congress, guided by economic analysis, and shaped by public input.”

Gensler has an “ambitious” rulemaking docket this year, according to Gail Bernstein, general counsel for the Investment Adviser Association in Washington.

Over the past 12 months, Bernstein told me, the IAA “has responded to SEC proposals relating to cybersecurity, outsourcing, private fund advisers, ESG, beneficial ownership reporting, shortening the settlement cycle and more.”

The proposals, Bernstein said, “impose new substantive requirements and also implicate new regulatory reporting, recordkeeping, and disclosure. Their cumulative impact will place tremendous strain on compliance resources at firms, in terms of time, expense, and personnel.”

What’s more, Bernstein continued, “there’s also no consideration of whether all these proposed requirements are internally consistent or duplicative, or how they would work together, which adds to the complexity that firms will have to work through.”

The outsourcing rule, adds Lynch, “has gotten pushback but so has the private funds rule and yet they have that one listed as in final stages. That is a surprise.”

Also, “some of the cyber rules are still in proposal and others in final,” Lynch said. “That seems odd as it would make more sense to move forward in tandem on that topic. ESG and the short sale rules are in final stages, which is expected.”

See the summary below for a list of rules the agency plans to tackle this year.

1. Custody Rules for RIAs

The agency plans to consider in April modernizing the regulations around the custody of client assets by investment advisors.

Issa Hanna, partner at Eversheds Sutherland in New York, said he hoped the SEC, in proposing a rule, would “take this opportunity to clarify some ambiguities under the existing rule so that firms have more certainty regarding their obligations.”

2. RIA Outsourcing

The SEC also plans to propose in April rules that would require advisors to vet third-party service providers.

The comment period on the plan expired on Dec. 27.

Bernstein told the agency in IAA’s comment letter that the plan is “unnecessary and unwarranted. It will have sweeping implications for all advisers and their service providers and substantial negative consequences for smaller advisers and smaller service providers.”

Further, she said, the commission “has not shown that the existing framework is lacking,” and has “proposed a broad new oversight framework. While the new framework is vague in its contours, its requirements are overly prescriptive.”

David Bellaire, general counsel for the Financial Services Institute, told the SEC in his comment letter that the plan is “unnecessary and unwarranted,” and urged the commission “to reconsider the necessity for moving forward with a new rule.”

Instead, Bellaire recommended the SEC “consider providing additional principles-based guidance under the Compliance Rule to assist advisers in tailoring their oversight processes to an ever-evolving landscape.”

Even if the commission determines that a new rule is called for, Bellaire added, as crafted the proposal is “not sufficiently tailored to achieve its goals. It also fails to adequately assess the potential negative consequences for advisers, their clients, and service providers.”

3. Fund Fee Disclosure and Reform

The agency plans to recommend in October that the SEC propose changes to regulatory requirements relating to registered investment companies’ fees and fee disclosure, which includes 12b-1 fees.

4. Investment Company Names

The commission plans to issue a final rule in October to address certain broad categories of investment company names that are likely to mislead investors about investments and risks.

The proposed amendments to the rule, according to the SEC, “are designed to increase investor protection by improving and clarifying the requirement for certain funds to adopt a policy to invest at least 80% of their assets in accordance with the investment focus that the fund’s name suggests, updating the rule’s notice requirements, and establishing recordkeeping requirements.”

The plan has received pushback. Eric Pan, president and CEO of the Investment Company Institute in Washington, told the SEC in August to discard its plan. The SEC’s current fund names rule “has worked well for 20 years. It recognizes that a fund’s name does not, and cannot, communicate everything that investors want to know about a fund before investing,” Pan said.

Prospective investors, Pan continued, “understand that a name is simply a starting point for understanding the fund’s investment strategies. In addition to the name, there are extensive documents prepared by funds describing their strategies, objectives and holdings.”

5. Private Fund Advisors; Documentation of RIA Compliance Reviews

The SEC plans to issue a final rule in April to adopt rules under the Advisers Act to address lack of transparency, conflicts of interest, and certain other matters involving private fund advisors.

The SEC’s proposal “was controversial,” says Hanna of Eversheds.

The sweeping plan, which includes five new rules, according to IAA, would prohibit private fund advisors from “conducting certain practices and from charging certain fees. The proposal would also require financial audits of private funds, fairness opinions for adviser-led secondary transactions, and quarterly reporting about fees, expenses, and performance related to each private fund and its portfolio companies.”

6 and 7. Digital Engagement Practices for RIAs and BDs

The SEC’s Division of Investment Management plans to propose two separate rules — one for RIAs and one for BDs — related to the use of predictive data analytics, differential marketing and behavioral prompts.

The rules would address the “gamification of investing.”

Gensler has questioned when design elements and psychological nudges associated with digital engagement platforms, or DEPs, “cross the line” and become recommendations.

“The answer to that question is important, because that might change the nature of the platform’s obligations under the securities laws,” Gensler has said.

“Even if certain practices might not meet the current definition of recommendation, I believe they raise a question as to whether there are some appropriate investor protection guardrails to consider, beyond simply the application of antifraud rules.”


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