It's going to be a busy year at the SEC.
On Friday, commission Chairwoman Mary Jo White kicked off the annual SEC Speaks conference with a laundry list of items on the agenda for 2016, including a pair of issues that would reshape the regulatory environment for investment advice.
"I will continue to develop support from my fellow commissioners for a uniform fiduciary duty for investment advisors and broker-dealers and to bring forward a workable program for third-party reviews to enhance the compliance of registered investment advisors," White said.
Investor-protection advocates have long been campaigning to brokers to the same fiduciary standard as advisors. This would require them only to make recommendations that are in the best interests of retail clients.
The third-party review program White noted is to address the shortfall in advisor examinations that the commission admits has created lax oversight in the RIA industry. The commission is in the process of trying to beef up its advisor exam staff by hiring new examiners and moving some personnel from the broker-dealer side of the Office of Compliance Inspections and Examinations to the advisor unit. White is hoping to advance a proposal to deputize a third-party organization to ease the burden on the commission by taking on some of those exams.
TIME RUNNING OUT
For White to accomplish all she wants, time is of the essence. It remains an open question whether she will be able to shepherd through either proposal before the clock runs out on the Obama administration, which is widely expected to prompt a shakeup of the commission's leadership.
Moreover, White is working on a crowded agenda, as she races to finalize lingering rules from the Dodd-Frank Act -- what she called the "most daunting rulemaking agenda in memory" -- and sets out other high-level priorities.
One of those is the asset-management sector. Following the enactment of final rules governing money market funds, the SEC trained its sights on asset managers "to address the increasingly complex portfolios and operations of mutual funds and ETFs," as White put it.
Last year saw a flurry of activity on that front, including proposals for enhanced reporting requirements for advisors and mutual funds, liquidity risk management and capping derivative-related risk.
"Finalizing these rules, as well as advancing proposals for transition planning and stress-testing, are among our 2016 priorities for the asset-management industry," White said.
White also addressed the shortcomings of disclosure as an investor safeguard. Increasingly, she said, the complexity of financial products underscores that disclosures about potential risks or compensation arrangements alone aren't enough to protect investors.
"In all of our work, we are challenged to look at how our other tools can complement disclosure to better carry out our regulatory objectives. Disclosure is enormously important, but one tool among many, and we need to use the right tools for the right job," White said. "We are therefore increasingly considering using measures beyond disclosure to fulfill our mission of providing strong investor protection, safeguarding market integrity and achieving other regulatory objectives, and we're seeking robust public comment as we do so."
White was quick to point out that she is not dismissing the value of disclosure, and that the commission continues to focus on "enhancing relevant disclosures" in every new rulemaking.
In addition to the uniform fiduciary standard and third-party exams, the commission is looking to a host of activity in areas like the structure of equity markets, cybersecurity, security-based swaps and executive compensation, among others.
"The agenda for 2016 is a very busy one," White says, "and we will work very hard to advance as many of these priorities as we can."
3 OF 5 FACING LONG ODDS
Significant challenges loom. At full count, the SEC is a five-person panel. At present, it is operating with three commissioners, with two appointees awaiting confirmation by the Senate.
White has been unable to win consensus support for her call for a uniform fiduciary standard, and even if the commission opted to move forward, it would be a complex and heavily lobbied undertaking that would be difficult to finish before the close of the administration.
Fiduciary advocates recognize the time constraints, but see a better chance for the third-party exam program to take shape under White's watch. Knut Rostad, president of the Institute for the Fiduciary Standard, says the exam initiative has a solid chance of taking shape before next January, but gives the fiduciary proposal only a vanishingly small chance.
"3P exams better than 50-50," Rostad writes in an email. "Uniform fiduciary less than 1 in 100."
- SEC Commissioner 'Not Convinced' on Uniform Fiduciary Standard
- SEC's White Links Fiduciary to RIA Exam Initiatives
- SEC Plans to Expand Staff to Increase Advisor Examinations