Over the coming year, financial regulators are expected to press ahead with scores of rulemaking proceedings that will affect advisors and their clients. Lawmakers will continue to refine and implement numerous provisions of the Dodd-Frank financial reform bill, while mulling the possibility of expanding oversight of investment advisors.
So what will be the headline policy issues that affect advisors? Here's a preview.
NEW RULES FOR RETIREMENT PLAN ADVISORS?
One of the first regulatory proceedings that could materialize in 2013 comes from the Department of Labor, which has been developing a proposal to apply a fiduciary duty to advisors who provide advice to retirement plans.
"I think we're going to see that very early," said Neil Simon, vice president for government relations with the Investment Adviser Association.
But the rulemaking has been the subject of intense controversy; some industry groups have warned that the DoL's proposal could effectively end the commission-based model for retirement plan advisors, in the name of curbing potential conflicts of interest. The department first offered a draft rule in October 2010, but later withdrew the proposal amid sharp criticism, including the concerns expressed by many lawmakers that the new regulations could impose undue burdens and costs on retirement plan advisors.
It remains an open question whether the reconstituted rule expected to be unveiled this year will be scaled back sufficiently to mollify critics in Congress and the industry.
"I think there will be a rule proposed," said Duane Thompson, senior policy analyst at fi360, a firm that provides education and training services to advisors, and president of legislative and media relations firm Potomac Strategies. " Whether they adopt it next year, that's another question."
SRO DEBATE ON HOLD ... UNTIL THE NEXT SCANDAL
Lawmakers on both sides of the aisle have acknowledged that the current system for oversight of investment advisors is insufficient. The Securities and Exchange Commission reported that it only examined 8% of registered advisors in 2011, and some 40% of advisors have never been subject to an examination.
In 2012, drawing on the SEC's report, the House Financial Services Committee took up the issue of enhancing the regulatory landscape for advisors. Two competing bills emerged: one that would provide for one or more self-regulatory organizations, or SROs, to take on the role of examining advisors, and another that would authorize the SEC to step up its own reviews, with funding provided through new user fees. Neither bill came up for a vote in the committee, leaving the issue for lawmakers to reconsider in the next session.
Momentum on the SRO debate appears to have stalled, at least for the time being. Rep. Jeb Hensarling (R-Texas), the incoming chairman of the Financial Services Committee, has indicated that he intends to take on issues like winding down the mortgage giants Fannie Mae and Freddie Mac, and address concerns about financial institutions deemed "too big to fail."
Washington insiders anticipate that legislation could be reintroduced that would revive 2012's twin approaches to advisor oversight, but that any bill faces long odds on its way to passage in the coming year.
"I don't know what the timing is. It's certainly quite possible that that legislation won't be introduced too early," said the Investment Adviser Association's Simon. "I do not anticipate that a law will be enacted in 2013," Simon added. "The nature of the process is slow."
But of course, Congress reacts to the headlines, and something like a high-profile scandal in the advisory profession could put an SRO bill back on the fast track, Thompson pointed out.
"You could see a hearing on the bill like last year. I think it's highly unlikely that you'll see it [pass], unless there's another Bernie Madoff fiasco that hits RIAs," Thompson said.
The most likely candidate to take on oversight of investment advisors in the role of an SRO would be the Financial Industry Regulatory Authority, or FINRA. The group has been trying to convince lawmakers that the SRO approach is preferable to expanding SEC oversight, and is expected continue its advocacy work in the coming year, though Simon and Thompson both suggested that most other stakeholders have let the issue slide to the back burner.
A spokeswoman for FINRA declined to comment for this story.
UNIFORM FIDUCIARY STANDARD DUE
One of the most closely watched proceedings at the SEC centers around development of a uniform fiduciary standard, extending the same regulatory responsibilities that are in place for investment advisors to broker-dealers. In January 2011, working under a mandate in the Dodd-Frank bill, the SEC produced a study recommending a uniform fiduciary standard -- but that effort has since stalled as the agency conducts a cost-benefit analysis.
Will the SEC move on it this year? The uniform fiduciary standard remains under active consideration within the agency, but a lot depends on how quickly the White House nominates a new SEC commissioner. With outgoing chairwoman Mary Schapiro stepping down, the agency will be led by existing commissioner Elisse Walter on an interim basis -- leaving the commission with just four members, two from each party. A partisan majority is often needed to press ahead with thorny regulatory proceedings.
"I do expect that once a majority vote can be mustered, [the uniform fiduciary standard] will move forward," Simon said. "It's not clear how easily the SEC will be able to act on issues of controversy. It will not be a five-person commission for some time but a four-person commission. That makes getting a majority that much more difficult."
REFORM FOR MONEY MARKET FUNDS?
In 2012, the SEC seemed close to enacting a reform of money market mutual funds to shore up the sector and prevent another destabilization like the one that jolted the $62 billion Reserve Primary Fund in 2008. Before announcing her departure, Schapiro had been backing a proposal to float the net asset value (NAV) of funds by tracking their share prices more closely with the value of the funds' underlying assets.
But in August, unable to secure the votes to pass the floating NAV proposal, Schapiro tabled the matter.
Money market fund reform has since been taken up by the Financial Stability Oversight Committee, or FSOC, under the Treasury Department. FSOC initiated a rulemaking proceeding in November, calling for public comment on a variety of reform proposals, including the floating NAV, as well as a requirement that funds maintain a baseline capital buffer.
The FSOC's proceeding enters the new year still in a preliminary stage, although it seems likely that some reforms aimed at stabilizing money market mutual funds will emerge in 2013. The floating NAV proposal, however, looks increasingly like a long shot, said Marc Pfeffer, a senior fund manager at CLS Investments. "I expect some market reforms to take place in 2013 but to leave the stable NAV of $1 intact," Pfeffer said.