Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues. Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.
Every year, we offer our predictions on what will happen in the investment management regulatory world. Last year, we went 4-6 (not great on a test, but pretty good in baseball). We were right about the fiduciary rule, whistleblowers, state enforcement, and individual liability. We missed on our predictions of regulatory changes and how the industry would respond to the increased demand for bonds.
The current uncertain regulatory environment has changed our hubris to humility. Thus, it is with humble intent that we look forward to offer our 2018 predictions:
Predictions for the 2018 Regulatory Year
- More states will adopt fiduciary rules. Nevada has already adopted a uniform fiduciary standard in the wake of the DoL’s delay. We expect other states (e.g. California, New York, Connecticut) to follow.
- The SEC will propose a uniform fiduciary rule for retail advisers and broker-dealers. Chairman Clayton has spoken publicly about the need for the SEC to wade into the fiduciary waters. Expect a proposed rule this year.
- The SEC will commence significant cybersecurity enforcement actions. The staff has done a sweep and issued guidance. We have not yet seen significant enforcement actions. We expect several this year.
- There will be cases alleging C-suite wrongdoing in private equity. The SEC Enforcement Division has focused on the private equity industry for the last couple of years. Given their interest in prosecuting senior executives to deter unlawful conduct, expect a couple of big cases against private equity execs.
- FINRA will bring actions against firms for hiring bad brokers. Rather than simply prosecute the brokers, FINRA will dedicate some enforcement resources to firms that fail to screen out the bad brokers, thereby making it a firm responsibility.
- SEC and/or FINRA will bring cases alleging inadequate branch office supervision. Both regulators have expressed concerns about remote office supervision. Enforcement cases will ensure the industry’s attention.
- The SEC will commence significant marketing/advertising cases. Seemingly out-of-the-blue, the SEC warned advisers about misleading marketing and advertising claims. We are assuming that OCIE is uncovering a lot of problems.
- The SEC will propose a re-write of the custody rule. The custody rule has the right intent, but the rule itself is too open to interpretation and questions (see multiple FAQs). We think the Division of Investment Management will undertake a re-write (although maybe this is just wishful thinking.)
- The SEC will propose cryptocurrency regulations. Bitcoin futures are flying high. The SEC has expressed its opinion that it should regulate cryptocurrency offerings. We expect some rules.
- The SEC will re-propose the ETF rule. Plain vanilla ETFs should have a rule that allows them to proceed without an exemptive order. The SEC proposed and abandoned a rule several years ago. We anticipate that the SEC will resuscitate the effort.
The SEC’s Division of Investment Management has issued regulatory guidance for robo-advisers to meet their disclosure, suitability, and compliance obligations. The IM staff recommends robust disclosures about the algorithm (functions, limitations, risks), overrides, third parties, fees, and client information. The staff also urges robo-advisers to adequately disclose limits on the models and to ensure that all disclosures are sufficiently clear and prominent. The staff stresses that robo-advisers must satisfy their suitability obligations by ensuring adequate and clear questionnaires, which would include a process to reconcile inconsistent responses. The Guidance requires robo-advisers to enhance their compliance programs to include policies and procedures to test the algorithm, analyze the questionnaires, oversee third parties, ensure proper disclosures, monitor social media, and protect against cyber-threats. The IM Staff warns that it “will monitor these innovations and implement safeguards, as necessary, to help facilitate such developments and protect investors.”
OUR TAKE: The SEC has been taking a hard look at robo-advisers and whether the digital advice model is consistent with securities laws. This Guidance will force many fintechs to increase compliance and operations spending to satisfy all the requirements described in this Guidance Notice.