On June 19, 2018, the SEC published a draft strategic plan for comment that outlined the Commission’s goals for the next four fiscal years, 2018 through 2022, and asked the public for comments on those goals. The core principles that the SEC has applied over the years are: “requiring sellers of securities to make material disclosures to facilitate informed decision-making; placing heightened responsibilities on key market participants; and using our examination and enforcement resources to bolster those requirements and protect investors.”
GOAL 1. Focus on the long-term interests of Main Street investors.
The SEC has identified five initiatives in pursuit of this strategic goal and its efforts to mitigate and respond to the identified challenges.
1.1 Enhance its understanding of the channels retail and institutional investors use to access our capital markets to more effectively tailor policy initiatives.
1.2 Enhance outreach, education, and consultation efforts, including in ways that are reflective of the diversity of investors and businesses.
1.3 Pursue enforcement and examination initiatives focused on identifying and addressing misconduct that impacts retail investors.
1.4 Modernize design, delivery, and content of disclosure so investors, including in particular retail investors, can access readable, useful, and timely information to make informed investment decisions.
1.5 Identify ways to increase the number and range of long-term, cost-effective investment options available to retail investors, including by expanding the number of companies that are SEC-registered and exchange-listed.
GOAL 2. Recognize significant developments and trends in our evolving capital markets and adjust efforts to ensure the SEC is effectively allocating its resources.
The SEC has identified four initiatives in pursuit of this strategic goal.
2.1 Expand market knowledge and oversight capabilities to identify, understand, analyze, and respond effectively to market developments and risks.
2.2 Identify, and take steps to address, existing SEC rules and approaches that are outdated.
2.3 Examine strategies to address cyber and other system and infrastructure risks faced by our capital markets and our market participants.
2.4 Promote agency preparedness and emergency response capabilities.
GOAL 3. Elevate the SEC’s performance by enhancing its analytical capabilities and human capital development.
The SEC has identified five initiatives in pursuit of this strategic goal.
3.1 Focus on the SEC’s workforce to increase its capabilities, leverage its shared commitment to investors, and promote diversity, inclusion, and equality of opportunity among the agency’s staff.
3.2 Expand the use of risk and data analytics to inform how the SEC sets regulatory priorities and focuses staff resources, including developing a data management program that treats data as an SEC-wide resource with appropriate data protections, enabling rigorous analysis at reduced cost.
3.3 Enhance the SEC’s analytics of market and industry data to prevent, detect, and prosecute improper behavior.
3.4 Enhance the agency’s internal control and risk management capabilities, including developing a robust and resilient program for dealing with threats to the security, integrity, and availability of the SEC’s systems and sensitive data.
3.5 Promote collaboration within and across SEC offices to ensure they are communicating effectively across the agency, including through evaluation of key internal processes that require significant collaboration.
How the Plan was Developed
“In developing the Strategic Plan, the SEC took into account the information gleaned from meetings with the many external parties with which the agency interacts on a regular basis, including members of Congress and congressional committees, investors, businesses, financial market participants, academics, and other experts and stakeholders. This includes formal outreach efforts through the SEC’s Investor Advisory Committee, Advisory Committee on Small and Emerging Companies, and Fixed Income Market Structure Advisory Committee; Commission-sponsored roundtables focused on specific issues; the agency’s Annual Government-Business Forum on Small Business Capital Formation; the SEC’s annual conference with the North American Securities Administrators Association; and solicitations of public comments on Commission rule proposals and strategic plans. Further, by publishing this draft Strategic Plan for public review and comment, we hope to gain the benefit of additional outside perspectives.”
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments: Send an e-mail to PerformancePlanning@sec.gov
Paper Comments: Send paper comments to Nicole Puccio, Branch Chief, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549–2521.
Standards of Conduct for Broker-Dealers and Investment Advisers
On June 21, 2018, in testimony before the U.S. House of Representatives Committee on Financial Services, SEC Chairman Jay Clayton identified the concerns expressed to him by investors, consumer groups, federal and state regulators, and others, as well as SEC staff with regards to the confusion on what to expect and not to expect from investment professionals. These interactions led him “to the conclusion that the Commission should lead—but not dictate—our federal and state regulatory efforts in this area in order to (1) address investor confusion regarding the roles of, and the differences between, broker-dealers and investment advisers; (2) establish standards of conduct that meet reasonable investor expectations and adequately address conflicts of interest; and (3) minimize the effects of regulatory complexity, and potentially inconsistent legal standards applied to financial advice, due to the number of regulators in this space.”
“Under current standards, it has been argued that broker-dealers are permitted to recommend to their retail customer a product that is ‘suitable’ for the customer but not as good for the customer as another product that the broker-dealer offers because the first product makes the broker-dealer more money. No reasonable retail investor thinks that makes sense. Most broker-dealers say they do not do this. I believe our regulations should prohibit this. Let me be clear: our proposed Regulation Best Interest would address this.
What would the broker-dealer have to do to act in the retail customer’s best interest? First, the broker-dealer would need to disclose material facts relating to the scope and terms of their relationship with the retail customer, including all material conflicts associated with the recommendation. Second, the broker-dealer would need to exercise reasonable diligence, care, skill and prudence to make recommendations that are in the best interest of the retail customer. Among other things, this standard would put greater emphasis on cost and financial incentives as factors in evaluating the facts and circumstances of a recommendation and whether it is in the customer’s best interest. Third, and the most significant, the broker-dealer would need to establish, maintain and enforce policies and procedures to eliminate, or mitigate and disclose, material conflicts of interest related to financial incentives. To be clear, disclosure alone would not be sufficient. Even if a broker-dealer has mitigated and disclosed its conflicts, its recommendations to the client cannot place the broker-dealer’s interests ahead of the retail customer’s interests.
The proposed broker-dealer best interest obligation draws from the principles underlying an investment adviser’s fiduciary duty, recognizing that both broker-dealers and investment advisers often provide advice in the face of conflicts of interest. These common principles are easier to compare given that as another part of our reform package we issued a proposed interpretation reaffirming—and in some cases clarifying—the fiduciary duty that investment advisers owe to their client. The interpretation is designed to provide advisers with a reference point for understanding their obligations to clients and reaffirms that an investment adviser must act in the best interests of its client.
While the two standards draw from common principles, some obligations of broker-dealers and investment advisers will differ because the relationship types of these investment professionals differ. This is a practical necessity. But the principles are the same, and I believe the outcomes in both cases should be the same: retail investors expect high-quality advice where their investment professional is not placing their interest ahead of the investor’s interest—I believe our proposals are designed to make sure they get just that.
Second, the rulemaking package would help retail investors understand who they are dealing with, what that means and why it matters. Our proposal would (1) require broker-dealers and investment advisers to clearly state what they are; and (2) prohibit stand-alone broker-dealers from using the terms ‘adviser’ or ‘advisor’ as part of their names or title. Also, firms would be required to provide investors with a new, distinct disclosure that we call a ‘Relationship Summary’ that would highlight key differences between broker-dealers and investment advisers, and also provide relevant questions for investors to ask. We have already received helpful suggestions from commenters, including retail investors, on how we can improve the proposed Relationship Summary via a ‘feedback flyer’ available on our website and look forward to even more engagement on how we get this disclosure right.
I believe that our framework will allow investment professionals to provide high-quality advice while maintaining a range of options for retail investors. More pointedly, and importantly for investors, this approach allows for further engagement with our fellow federal and state regulators to seek consistency and cohesion across the spectrum of investment professionals and products—and we intend to work closely with them to promote regulatory harmonization and reduce duplication and inconsistency.”
Folks, it’s put-up or shut-up time. The SEC has asked for our comments on both of these issues, so if we have anything to add to the discussion we need to raise our voices (or send our emails). The SEC has posted comments received on Standards of Conduct on it’s website:
For Investment Advisers https://www.sec.gov/comments/s7-09-18/s70918.htm
For Broker-Dealers https://www.sec.gov/comments/s7-07-18/s70718.htm