Timothy M. Simons, CFA, CFP, CIPM, CSCP
Senior Managing Member
Focus 1 Associates LLC
December 28, 2016
As the end of 2016 nears, I would like to spend a little time talking about the SEC’s Fiduciary Rule. Under Dodd Frank in 2010, the SEC was authorized to create a Fiduciary Rule that would apply to Registered Investment Advisers and Broker-Dealers, and we are still waiting for that Rule. In the meantime (six years), the Department of Labor (“DOL”) decided to create a Fiduciary Rule that would apply to Investment Advisers and Broker-Dealers that provide services to ERISA plans. Although, unquestionably, ERISA plans fall under the jurisdiction of the DOL, there are those in our industry that feel the DOL was reaching beyond its jurisdiction to write a rule that would impact Registered Investment Advisers and Broker-Dealers and how they operate their businesses. In fact, several industry organizations have sued the DOL for reaching beyond its authority. Unfortunately for us, so far the courts have ruled in favor of the DOL.
Finally, in 2016, we heard from the SEC that they were working on a Fiduciary Rule and would coordinate with the DOL on the SEC’s version, and could have a Rule in place by April 2017, when the DOL Fiduciary Rule becomes effective. Now we hear that Chair White will be leaving the SEC on January 20, 2017, when President Obama will be replaced by President-Elect Trump, making it unlikely for a new rule. The SEC is already down two Commissioners, and with Chair White leaving, will be down three, one of whom will be the new Chair. Interestingly, it appears Senate Democrats have blocked President Obama’s nominees for the vacant positions. Although President Trump will nominate individuals for all three positions, there has been no announcement to date. Apparently, Commissioner Piwowar (Republican) will become acting Chair upon Chair White’s departure.
Even though attempts to remove the DOL Fiduciary Rule have been futile so far, there appears to be a large group of Republican legislators who would like to see the DOL Fiduciary Rule removed. It seems this would be difficult through the legislative process, but the incoming Secretary of Labor will be able to delay the implementation of the Rule, or negate it by refusing to enforce it. It would be the DOL’s responsibility to enforce the Rule, not the SEC or any other federal agency, which would probably require the DOL to ask for additional funds from the Republican Congress.
Back in January 2016, the SEC identified for us the areas on which they chose to focus for fiscal year 2016. Looking back over the fiscal year results, we see that the SEC’s significant cases have not involved those areas, but rather:
- Insider trading and beneficial ownership reporting-related charges against Leon G. Cooperman and his firm Omega Advisors.
- Insider trading charges against William “Billy” Walters and his source Thomas C. Davis, a former Dean Foods Company board member.
- A $415 million enforcement action against Merrill Lynch for violating customer protection rules by misusing customer cash and putting customer securities at risk. The firm also admitted wrongdoing.
- A $267 million enforcement action against J.P. Morgan wealth management subsidiaries, for failing to disclose conflicts of interest to clients. The firms also admitted wrongdoing.
- Foreign Corrupt Practices Act cases against the Och-Ziff hedge fund and its CEO and CFO and against VimpelCom Ltd. in which the companies paid hundreds of millions of dollars to settle the charges.
According to an October 11, 2016 press release, the SEC filed 868 enforcement actions in 2016, “exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.” The press release includes links to the majority of the SEC cases identified.
SEC Chair Mary Jo White said, “By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions. Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”
It is interesting for me to note that the SEC issued a press release on the results of the enforcement program, but nothing about the examination program. This shows me where the SEC’s priorities lie because the fiscal year ends on the same date for both programs, and we get enforcement results in 11 days, yet we get little or no information on the examination results.
A Rationale for Examination Results
Marc Wyatt, the Director of OCIE at the SEC, addressed attendees of the National Society of Compliance Professionals 2016 National Conference on October 17, 2016. That speech is posted on the SEC website and is worth the read by anyone in the business. Marc is the first Director of OCIE to come from the examination program, starting with the SEC in 2012 as a Senior Specialized Examiner focused on private equity and hedge funds. He is also the first Director of OCIE who is not a lawyer. In his speech, he talked about OCIE, how it operates and the tasks it is assigned, not just the examinations of IAs and BDs, mutual funds and ETFs, municipal advisers, and transfer agents, but also the 18 national securities exchanges, FINRA, SIPC, PCAOB, MSRB, and the eight active clearing agencies. They examine these 28,000 registrants with a staff of about a thousand, and although that doesn’t sound too bad, only 28 exams per examiner per year, almost all of the examinations are conducted by teams of two to five examiners. If a two person team examined 28 registrants in a year that would still only be an average of 14 per examiner, and a team of five or six examiners might take 4 to 6 weeks to examine a large mutual fund complex, which might only include one investment adviser, justification for a lesser number of examinations per examiner. OCIE is trying to get away from being deemed successful by the number of examinations, but rather by the impact on the industry of the examination program.
I have no crystal ball, so I don’t know what will happen when the Trump administration is in place, although I do know that Paul Atkins, a former SEC Commissioner (2002 – 2008) under President George W. Bush, is working with the transition team to identify candidates for the SEC roles. We do know that Trump has indicated a desire to reduce regulations hampering our financial markets, but other than Dodd-Frank and the DOL Fiduciary Rule, I haven’t heard specific rules mentioned. I think that the mandates for Dodd-Frank that have already been addressed via rule-making have been instituted and may be difficult to eliminate, but I would not be surprised if the mandates that have not been addressed die on the vine.
I think 2017 will be a very interesting year for our industry and the economy in general, especially if we can get anywhere close to full employment.
Best wishes for a Happy New Year!