So where do we stand on the Department of Labor’s attempt to force a new definition of “fiduciary” on anyone who touches ERISA accounts? The proposed Rule was sent to the Office of Management and Budget (“OMB”) for a final review in the last week of January, 2016. The OMB review can take up to 90 days, but can be expedited which could shorten the review to 50 days, which means the review could be completed any day now. One of the main objectives of the OMB review is to assess both the costs and benefits of the intended regulation and to adopt a regulation only after a determination that the benefits of the regulation justify its costs. A concern of mine is that the SEC, who oversees all the major players in the financial services industry, seems to underestimate the costs of regulatory compliance when proposing rules, so how accurate is the estimate going to be for an agency that is only tangentially related to our industry? Once the determination of net benefits is made, the regulation can be published, followed by an eight-month implementation period, which means the Rule would be finalized and on the books by December, one month before President Obama leaves office.
There were a fairly large number of comments on this proposed Rule, both for and against, and talk in the Congress about blocking or amending the Rule. We have no way of knowing, before the Rule is published, the changes to the proposed Rule that were made by the DOL. My sense is that many of the broker-dealers who will be impacted by the Rule as proposed, have started making changes that they expect to remain in the final Rule. On the investment adviser side, most appear to be waiting to determine how they will be impacted, if at all, depending on their business model. I don’t think that guessing how the final Rule will affect us is a productive use of time, especially at this time of year, and I feel confident that we will be better off to not worry until we see the final Rule.
SEC’s Fiduciary Rule
We know that Dodd-Frank authorized the SEC to develop a fiduciary standard for investment advisers and broker-dealers, something holding us all to the same standard, but that initiative has moved forward at a glacial pace. We know that there has been disagreement between the Commissioners as to promoting a standard fiduciary rule, primarily around the additional recordkeeping requirements and the additional cost for industry participants. Without knowing the content of an SEC Fiduciary Rule, I think most of us in the business would rather be held to an SEC standard than a DOL standard.
Just as a kind of afterthought, who is going to enforce the DOL Fiduciary Rule? Does the DOL have examiners qualified to conduct examinations of investment advisers and broker-dealers? Would the SEC be willing to add more requirements to their examinations? Who would be responsible for determining the behavior that requires enforcement action, and then, which agency would bring the action? Will the Congress be able to block the DOL Rule and allow the SEC to put forward the SEC version? Again, I think this too will depend on the final Rule adopted and whether the Congress can stop it. And, let’s not forget that the administration will change in January, 2017, and many of these players will change.
Third Party Examiners
We know the SEC has a monumental task policing our industry, as Chair White stated in her testimony to the Congress last week:
The SEC is charged with overseeing approximately 27,000 market participants, including nearly 12,000 investment advisers, almost 11,000 mutual funds and exchange-traded funds, over 4,000 broker-dealers, and over 400 transfer agents. The agency also oversees 18 national securities exchanges, 10 credit rating agencies, and six active registered clearing agencies, as well as the Public Company Accounting Oversight Board (PCAOB), Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB), the Securities Investor Protection Corporation (SIPC), and the Financial Accounting Standards Board (FASB). In addition, the SEC is responsible for selectively reviewing the disclosures and financial statements of over 9,100 reporting companies….The size and complexity of the entities the SEC regulates has also expanded exponentially. From 2001 to 2015, assets under management of SEC-registered advisers more than tripled from approximately $21.5 trillion to approximately $66.8 trillion, and assets under management of mutual funds more than doubled from $7 trillion to over $15 trillion. Trading volume in the equity markets from 2001 through 2015 nearly tripled to over $70 trillion.
Although there has been a rumor that the SEC would move 100 broker-dealer examiners to the investment adviser side, in her testimony, Chair White did not mention moving broker-dealer examiners to the investment adviser program in an effort to increase the ten percent annual examination rate of investment advisers. When I joined the SEC in 1988, we were examining about six percent of the registered investment advisers per year and had advisers that had been registered for 27 years and never examined. We had advisers who registered, advised clients for 25 years, and retired, never having seen anyone from the SEC. The problem today is that the number of registered investment advisers increases at a faster rate than the number of investment adviser examiners, and is expected to rise to 12,500 by FY 2017. The goal with an increased budget for FY 2017 would be to hire an additional 250 staff, but only 127 of them would be examiners, and not all of them would be dedicated to investment adviser exams.
The last sentence in the last footnote to Chair White’s testimony was of special interest to us: “I expect to continue to develop support from my fellow Commissioners for a uniform fiduciary duty for investment advisers and broker-dealers, and to bring forward a workable program for third party assessments to enhance the compliance of registered investment advisers.”
I still have a lot of reservations about third-party exams and how they will be used by the SEC, but there are many in the industry thinking that is the only way to go. I don’t see it happening before the next administration comes into office, but who knows what will happen then?