What's on tap in 2016 for adviser regulation?

Will fiduciary duty come to fruition?

Dec 23, 2015 @ 1:20 pm

By Mark Schoeff Jr.

Fiduciary duty could finally come to fruition next year.

The Labor Department is poised to release a final rule in the spring that would require financial advisers to act in the best interests of their clients when dealing with retirement accounts. Meanwhile, the Securities and Exchange Commission has put a similar proposal for retail investment advice on its regulatory agenda.

Timing of the final DOL rule is crucial. The agency needs to get it published in the Federal Register in time for the effective date — usually 60 days afterward — to fall well before Inauguration Day, so that a new presidential administration cannot rip up the rule and start over.

“If it's a Republican who gets into office, all bets are off,” said Duane Thompson, senior policy analyst at Fi360, a fiduciary consulting firm. “It's in the best interests of DOL to get the rule done early in the year.”

The DOL rule survived a legislative attempt to stop it in the omnibus government funding bill that Congress approved earlier this month. Although the financial industry will continue to resist, the rule likely will be finalized. After that, its fate could be determined by the inevitable lawsuit.

The prospects of seeing an SEC fiduciary-duty proposal this year are dim. Although SEC Chairwoman Mary Jo White supports a rule, she must gain the support of at least two commissioners.

“It would be very tough for her to get this done by October,” said Karen Barr, president and chief executive of the Investment Adviser Association, in reference to the SEC's regulatory agenda. “This is a really complicated and controversial issue.”

Moreover, the SEC will be busy next year.

“They have some big, meaty issues to grapple with,” Ms. Barr said.

Among the regulatory development to watch:

Third-party exams: The SEC only examines about 10% of the approximately 11,500 registered investment advisers each year. The agency staff is working on a proposal to augment the SEC's oversight with third-party exams. Reviewing advisers is not as controversial as raising advice standards, which means this rule could move faster than a fiduciary rule. “Politically, it's not as complicated an issue, at least for the chair,” said Neil Simon, IAA vice president for government relations.

SEC nominees: With the departure of Republican member Daniel Gallagher Jr. and Democratic member Luis Aguilar, the SEC is down to three members. It's unclear when the Senate will confirm their replacements, Republican Hester Peirce and Democrat Lisa Fairfax. Until then, don't expect the SEC to propose major rules. Ms. Peirce is coming from an academic research position and Ms. Fairfax is a law professor. “It's unfortunate that there will not be a commissioner with industry experience,” Ms. Barr said.

Transition rule for investment advisers: The SEC has begun to propose rules to reduce systemic risks in the asset-management industry. The agency has issued proposals on data gathering, liquidity and derivatives. On deck is a proposal that would require investment advisers to implement transition plans in the case of the loss of a firm's leader or a major disruption to the business.

Cybersecurity: The SEC is engaged in a second round of sweep exams to assess cybersecurity at advisory firms. Although a rule in this area is not expected, the agency may follow up exams with enforcement. It filed a case earlier this year. “Cybersecurity is going to be taken to a new level,” Mr. Thompson said.

New leadership at Finra: Financial Industry and Regulatory Authority Inc. chairman and chief executive Richard Ketchum will retire in 2016. He would like to leave the industry-funded broker-dealer regulator by summer, depending on when his successor is named.


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