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.
A few weeks back, we offered our predictions for 2017 (see https://cipperman.com/2016/12/02/friday-list-2017-predictions/) . Today, we look back on the most significant investment management regulatory trends for 2016. Of course, past performance is no guarantee of future results. However, as any handicapper will tell you, past behavior often foretells future actions.
10 Most Significant Regulatory Trends for 2016
- Enforcement Actions – SEC Chair White continued her “broken windows” enforcement against even the smallest infractions. The SEC reported a record number of enforcement actions, including 160 cases against investment advisers and investment companies.
- Personal Liability – According to the SEC’s outgoing Enforcement Chief, the Enforcement Division names an individual in over 80% of cases. This past year, we have seen cases against senior executives, mid-level executives, Chief Compliance Officers, and everybody in between.
- Fiduciary Duty – The Department of Labor adopted the long-debated fiduciary rule, which will upend the advice industry. Additionally, the SEC considered a fiduciary rule for retail brokers, while FINRA supported a fiduciary standard.
- Cybersecurity – Hackers forced senior executives to learn new terms such as “firewall,” “vulnerability assessment,” and “intrusion.” Many firms faced liability for failing to monitor service providers.
- Private Equity – The SEC instituted several 7-8 figure cases against the biggest names in private equity, an industry un-regulated until Dodd-Frank.
- Whistleblowers –The SEC’s Whistleblower Office reported more than $100 Million in aggregate awards. The SEC also brought several cases alleging retaliation and illegal confidentiality agreements.
- Retail Distribution – Both FINRA and the SEC attacked wrap sponsors for the wrong share class recommendations and trading away. At least 15 firms were charged for failing to conduct sufficient due diligence on third party performance claims. The Investment Management Division continues to analyze 12b-1 fees and other distribution-in-guise payments.
- Gatekeeper Liability – Service providers have suffered by association with miscreant clients. This past year saw enforcement activity against administrators, lawyers, auditors, custodians, directors, and consultants.
- Robos – Massachusetts raised concerns about how robo platforms satisfy their fiduciary responsibilities. Meanwhile, FINRA heightened supervision of robo providers.
- Compliance Outsourcing – The SEC has recognized compliance outsourcing as a growing trend. That trend accelerated in 2016: nearly 20% of advisers outsource compliance and approximately 2/3 use an outside compliance consultant. Chair White has announced that the SEC staff has completed a proposal requiring all advisers to undergo third party compliance reviews.