5 regulatory issues every financial adviser should be watching

Sure, the delay of the DOL's fiduciary rule is big news. But there are other important matters going on in Washington.

Apr 9, 2017 @ 12:01 am

By Mark Schoeff Jr.

Although the epic battle over the Department of Labor's fiduciary rule will continue for at least several more months, if not years, and dominate the regulatory agenda for investment advice, other critical issues are bubbling to the surface. Several may even have a chance of advancing in this cold political climate, as industry groups, consumer advocates and regulators sound a note of consensus on areas such as reforming adviser titles, cracking down on elder financial abuse and protecting retirement tax incentives, according to a panel of experts assembled by InvestmentNews.

The Regulatory Roundtable, which occurred just days before the April 10 implementation date of the DOL fiduciary rule was officially delayed, focused initially on that regulation and how the disagreement over it illustrates the widening chasm between Republicans and Democrats.

"This difference I've seen that predates President [Donald J.] Trump is this hyperpartisanship now on issues related to investor protection, retirement security, issues that we just don't think are partisan issues," Maureen Thompson, vice president for public policy at the Certified Financial Planner Board of Standards Inc., said at the event, held at the National Press Club in Washington.

The Consumer Federation of America has been a stalwart supporter of the DOL rule, which advocates say will protect investors from conflicted advice that leads to sales of high-fee products that erode retirement savings. But its defense of the measure has drawn only Democratic support.

"Unfortunately, all Republicans have been quite antagonistic to the fiduciary rule, and it has become a partisan issue," said Micah Hauptman, financial services counsel at the Consumer Federation of America.

But Ira Hammerman, executive vice president and general counsel at the Securities Industry and Financial Markets Association, said there are Democratic senators who agree with his group that the DOL rule is flawed.

Fiduciary rule: 'Not all chocolates and roses'

"We would look to them to continue to be supportive of finding an appropriate solution and an appropriate way forward on this very important issue," he said.

When Mr. Hammerman said SIFMA supports a standard of acting in a client's best interests, he drew criticism from Mr. Hauptman, who said that "it's really best-interest in name only."

Mr. Hammerman responded: "This DOL rule is not all chocolate and roses. This rule actually hurts the people that the DOL is trying to help."


Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors, said politics could be causing more of a divide than actually exists. "When I would talk to different lawmakers, they would say, 'I'm with you and I'll write a letter, but at the end of the day, I can't afford to oppose the president because I have to go up for re-election, and he has made this his top priority,'" he said.

These exchanges encapsulate the ongoing debate, as DOL reviews — and possibly modifies or repeals — the rule, as directed by Mr. Trump.

"It's like you go back in time a year and a half, and everyone will be weighing in again with a lot of letters," Mr. Mayeux said. The process will be jarring, said David Tittsworth, counsel at Ropes & Gray.

(More: Opponents troubled by mere 60-day delay of DOL fiduciary rule)

"It ain't pretty at all," Mr. Tittsworth said. "To call this inartful rulemaking would be a gross exaggeration. It's ugly. You're going to see this thing delayed several [times] before you get to the end of the rainbow."

But there are other issues on the horizon where more of a consensus could be reached, according to the group of nine analysts and officials from adviser and consumer organizations. Five of the biggest are detailed here.


Another big issue Washington will try to tackle this year also has repercussions for financial advisers and their clients: comprehensive tax reform.

It's unclear where the Trump administration and Congress are headed with legislation, but if they want to reduce tax rates across the board, as both sides have said, they will have to come up with revenue to pay for it if they don't want the federal deficit to grow.

One of the so-called "pay-fors" that is often mentioned is curbing tax deferrals for retirement savings, the tax breaks provided for contributions to 401(k)s and individual retirement accounts.

"If there is truly a bipartisan issue in Congress, it is that America is undersaved," said Cathy Weatherford, president and CEO of the Insured Retirement Institute. "So I think that, end of day, we all have a lot of shoe leather to wear down on the Hill to make sure that balancing our federal budget and taking care of our issues with regard to tax is not done on the backs of American savers."


Reps. Ann Wagner, R-Mo., and Jeb Hensarling, R-Texas

Reform of financial adviser titles could become a kind of "fiduciary lite."

A provision of a bill last year to overhaul the Dodd-Frank financial reform law instructs the SEC to consider alternatives to a uniform fiduciary standard, including "simplifying the titles used by brokers, dealers and investment advisers." The provision is likely to remain in the bill when it is reintroduced later this year, according to a spokesman for the author, House Financial Services Chairman Jeb Hensarling, R-Texas.

Helping investors distinguish between a broker, who meets a suitability standard, and an investment adviser, who's obligated to a fiduciary duty, appeals to Maureen Thompson, vice president for public policy at the Certified Financial Planner Board of Standards Inc. There are also certifications to consider.

"There are so many of them out there — hundreds — that people use to market themselves to consumers and investors," Ms. Thompson said. "A concern we have is what are behind those designations."

(More: DOL fiduciary rule changes not one size fits all)

But Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors, is wary of prohibiting insurance agents from calling themselves advisers because he says they provide guidance on a range of investments.

"When you're consulting with a client as to what's the right thing to do to make sure they're properly prepared for their future, it's a mix," he said. "We don't see a problem with one person or one office being able to do that for their clients, especially on Main Street USA, where you've got a small town with only a few folks that offer it."


Jay Clayton (left) and Robert Cook

New leaders will​ set the agenda at the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. this year. Mr. Trump's nominee for SEC chairman, securities lawyer Jay Clayton, is awaiting a Senate confirmation vote. Robert Cook, Finra's president and CEO, was appointed last August.

Mr. Clayton has given no indication of where he stands on adviser issues such as fiduciary duty and adviser examinations.

Duane Thompson, senior policy analyst at fi360, a fiduciary training and consulting firm, said the Trump administration will not seek major increases in the SEC's budget, and the agency's annual examination rate of approximately 11% of the more than 12,000 registered investment advisers is not likely to rise.

"Unless we see [Mr.] Clayton suddenly get interested in third-party examinations, I think advisers will be able to breathe easier, at least in the sense that they won't have to worry about having a knock on their door over the next four years," Mr. Thompson said.

Mr. Cook has begun his tenure on a "listening tour" of Finra firms, industry interest groups and investor advocacy organizations.

(More: Finra's new chief Robert Cook vows to take a 'fresh look' at enforcement)

"It's no secret that there are people on both sides of the aisle that either look at Finra as too pro-industry or not pro-industry enough, and so he's going to have to walk a fine line to make sure he doesn't ruffle any feathers on either side," said Micah Hauptman, financial services counsel at the Consumer Federation of America.


Jay Clayton, President Trump's nominee to head the SEC, has been clear about his support for making it easier for start-up companies to raise capital. That could create a favorable atmosphere for SEC action on changing the definition of an accredited investor who can purchase nonregistered securities.

Under current rules, only investors who have an annual income of $200,000 or more, or a net worth of more than $1 million, excluding the value of a home, can participate in private placements. But Mr. Clayton's arrival at the SEC, combined with support on Capitol Hill from both parties, gives the issue momentum.

"That's one area where there is actually some bipartisan support for legislation in Congress, and I think also at the SEC," said Duane Thompson, senior policy analyst at fi360. "The new [SEC] chairman is going to be very supportive of capital formation, so that would sort of contribute to that."

But Mr. Clayton must remember ordinary investors as he tries to turbocharge capital raising, according to Micah Hauptman, financial services counsel at the Consumer Federation of America.

"I hope he understands that it's an ecosystem, that you can't just take away the protections for investors to make things easier on issuers, because there are going to be downstream repercussions, and they are likely to be pretty negative," he said.

Could we see bipartisan support for the fiduciary rule?


The pace of regulatory activity changes as presidential administrations come and go and as Congress changes hands. But the swirl has James Allen, head of capital markets policy for the Americas at the CFA Institute, frustrated.

He pointed to the opposite directions — more regulation and deregulation — taken by the Dodd-Frank law and the Financial CHOICE Act, written by House Financial Services Chairman Jeb Hensarling, R-Texas, to undo much of Dodd-Frank.

"Somewhere in the middle our members said enough, just enforce what's already there and do it in a better and more effective way," Mr. Allen said.

Duplication on cybersecurity

But Ira Hammerman, executive vice president and general counsel at the Securities Industry and Financial Markets Associaqtion, said there is too much duplication on cybersecurity, where he said seven different regulators are promulgating rules.

"One says go to the left, and the other says go to the right, and this one wants a report on Tuesdays and this one wants it on Thursdays," he said.

He also expressed some concern about overlap on battling elder financial abuse, with Finra and state regulators issuing rules. But Joey Brady, executive director of the North American Securities Administrators Association, sees it differently.

"The NASAA model rule and the Finra rule are more alike than they are different," he said. For example, "they do have ultimately the same provisions relative to how much time you can hold a transaction."


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