SEC Outlines Busy Agenda for RIAs | Lord Abbett

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Practice Management

The nation's top securities regulator is developing new proposals to expand oversight of advisors and asset managers

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

As the SEC marked the 75th anniversary of the landmark statutes establishing oversight of investment advisors and mutual funds, the nation's top securities regulator cautioned that additional rules are needed to rein in the industry and protect investors.

In opening remarks at a day-long conference focused on the legacy of the 1940 Investment Company Act and Investment Advisers Act, SEC chairman Mary Jo White indicated that the commission is developing new proposals to expand oversight of advisors and asset managers. Those proposals would include increased practice examinations and a uniform fiduciary standard.

"Today, as many of you know, the commission has an ambitious agenda to address evolving risks for funds and advisors," White says.

That work is ongoing. White cites the commission's initiative to increase data-reporting requirements for investment companies and advisors, and the proposal, rolled out in late September, to require mutual funds and ETFs to implement liquidity risk-management programs.

Looking ahead, White says that staffers are currently working on a proposal regarding the use of derivatives in funds—including leverage limitations—that she hopes to bring before the commission by the end of the year.

Farther down the road, the agenda becomes even more ambitious.

"Beyond that, the staff is developing recommendations regarding transition planning for advisors, annual stress testing by large investment advisors and firms, a program of third-party examination for investment advisors, and a uniform fiduciary duty for investment advisors and broker/dealers," White says. "Talk about a full plate of critical initiatives."

White positions those efforts as keeping in with the spirit of the 1940 acts, which have required regulators to find a balance that allows for sensible investor protections without stifling innovation in the advisor and asset-management industries.

For the last few years, advisors have been closely watching the SEC for signs that it would take action on a uniform fiduciary standard—which White has said she believes is a needed consumer protection—and a proposal to increase the frequency of RIA examinations.

Regarding the exams, the SEC has been unsuccessful in securing more funding from Congress to send more auditors to RIA firms. The commission has reported that advisors are examined, on average, once every 11 years. But that only tells part of the story: The SEC's Office of Compliance Inspections and Examinations has been prioritizing larger and higher-risk firms, and has acknowledged that around 40% of registered advisors have never been examined.

"I think things are actually considerably worse than that 11-year cycle number, because many advisors are examined more frequently than that, so when you look at the small- to medium-sized advisors, it stretches out for what, in effect, is an eternity," says Elisse Walter, White's immediate predecessor as SEC chairwoman.

Absent increased funding from Congress, commission staffers have been developing a proposal that would authorize a third-party group to help conduct advisor exams.

The fiduciary issue, which would bring broker/dealers in line with the rules that govern RIAs—in particular, the requirement to act in a client's best interest—has been kicking around the commission since before White arrived. And though she has expressed support for the measure, she has not made public any formal proposal.

With less than a year and a half left in the Obama administration, some investor advocates who back a uniform fiduciary standard concede that the window is too narrow to begin and complete such a major rulemaking before there's a new cast of characters in the White House and the SEC. Count among those Marilyn Mohrman-Gillis, managing director of public policy and communications at the CFP Board, who addressed the issue in a meeting with reporters on the sidelines of the Financial Planning Coalition's conference in Boston at the end of September.

"It's not going to happen under the current administration's SEC," Mohrman-Gillis said. "It's not going to happen before Obama goes out of office, so if it's going to happen, it's going to happen under a new chair."

—Kenneth Corbin 



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