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The Friday List: My 2019 Predictions

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. 

As reported last week, I went 8-2 on my 2018 regulatory predictions, bringing my mark to 22-15-3 over the last four years.  For the upcoming year, I want to take a few more chances and swing for the fences on a couple of predictions. While this may lower my percentage, I hope my readers and our clients will reward the boldness (perhaps by reading my new book: The Compliance Advantage: Ten Must-Know Trends to Protect Your Investment Firm (available on Amazon). 

Predictions for the 2019 Regulatory Year

  1. The SEC will propose a comprehensive adviser marketing/advertising rule.  Last year, we accurately predicted that the Enforcement Division would focus on marketing and advertising cases.  We predict that the Division of Investment Management will use these cases as the justification to propose a new rule addressing adviser marketing practices.
  2. The SEC will re-propose the broker best interest standard.  Responding to industry comments, the SEC will re-propose the rule and make it closer to an adviser fiduciary standard but stopping just short of reconciling the two standards. 
  3. The Enforcement Division will bring several significant cases alleging violations of the solicitor rule.  OCIE has already cited widespread noncompliance with the solicitation rule (206(4)-3), which limits how advisers can pay solicitors for recommending their services.  We expect that the Enforcement Division will follow up with significant litigation. 
  4. The SEC will liberalize the private offering rules.  Look for the SEC to raise the accredited investor definition, change offering exemptions, or seek new private offering categories. 
  5. OCIE will examine at least 20% of advisers.  Chairman Clayton committed to increasing adviser reviews to respond to media and Congressional criticism that the SEC needs to enhance industry supervision.  The SEC reviewed 15% of advisers last year.  This will be the year that the SEC hits the 20% mark. 
  6. The SEC will bring significant cases against independent fund directors.  Both OCIE and the Enforcement Division have increased scrutiny of registered funds and their management.  I foresee that the Enforcement Division will go beyond the fund sponsors and look to hold independent directors accountable for regulatory failures. 
  7. The SEC will allege securities fraud in secondary market private equity transactions.  Both private equity sponsors and third parties have expanded the secondary market for private equity investments.  Because of the information imbalance between buyers and sellers, we expect that the SEC will seek to even the playing field by bringing securities fraud cases.   
  8. The SEC will approve a registered crypto fund.  I won’t try to predict which fund, or the conditions imposed, but I believe the SEC will green-light at least one crypto-based registered fund.  I suspect it will be sponsored by a (very) large firm. 
  9. The Supreme Court will decide that digital tokens are not securities and that an ICO is not a securities offering.  This issue is roiling the lower courts and the industry.  Eventually, the Supremes will have to end the uncertainty.  Although I think there are good arguments on both sides, I think this Supreme Court will rule against SEC regulation. 
  10. The SEC will expand the whistleblower program.  The SEC will expand the program to include criminal actions prosecuted by the Department of Justice as well as state enforcement actions. 

A Review of My 2018 Predictions

(Nostradamus, famous 16th Century soothsayer)

Every year, I offer my predictions on what will happen in the investment management regulatory world.  (I will publish my 2019 predictions next Friday.)  For 2018, I went 8-2, a record that suggests that I spend way too much time thinking about regulatory issues.   For comparison, I went 4-6 in 2017, 4-3-3 in 2016 and 6-4 in 2015.  Overall, this is not a bad record.  Below are the predictions I made last December and what happened:

A Review of My 2018 Predictions

More states will adopt fiduciary rulesMaryland and New York both adopted fiduciary rules, and it appears New Jersey is moving that direction. (1-0)

The SEC will propose a uniform fiduciary rule for retail advisers and broker-dealers.   The SEC did in fact propose a best interest standard for brokers.  I am especially proud of this prediction as I did not foresee that the Fifth Circuit would completely vacate the DoL fiduciary rule.  (2-0)

The SEC will commence significant cybersecurity enforcement actionsThe SEC fined a large internet company $35 Million for failing to disclose a third-party hack into personal customer information.  It also fined a BD/IA $1 Million for failing to prevent third parties from accessing customer information.  (3-0)

There will be cases alleging C-suite wrongdoing in private equity.  Among other actions, the SEC censured and fined the principal of a PE firm for offering below-market purchase offers to LPs and barred a managing partner for failing to disclose conflicts of interest. (4-0)

FINRA will bring actions against firms for hiring bad brokers.  There were several FINRA cases, but the most significant was an action where the SEC fined a broker-dealer $3.6 Million for failing to stop a broker from stealing from clients.  (5-0)

SEC and/or FINRA will bring cases alleging inadequate branch office supervision.  There were cases for failing to stop misleading disclosures about disciplinary histories, neglecting to implement proper AML procedures, and selling away.  (6-0)

The SEC will commence significant marketing/advertising cases.  There were several actions involving bad marketing practices including the misuse of hypothetical backtested performance, mis-representing black box quant models, and violating the testimonial prohibition. (7-0)

The SEC will propose a re-write of the custody rule.  This did not happen, although, as we said last December, it may have been wishful thinking. (7-1)

The SEC will propose cryptocurrency regulations.  The SEC has not yet proposed specific regulations, although the Division of Investment Management has asked the industry to consider valuation, liquidity, custody, and marketing of cryptocurrencies. (7-2)

The SEC will re-propose the ETF rule.  In June, the SEC proposed new rule 6c-11 would allow ETFs structured as open-end funds to operate so long as they provide daily portfolio transparency on their websites, disclose historical premium, discount and bid-ask spread information, and adopt policies and procedures about the use of custom baskets.  (8-2)

The Friday List: Our 2018 Predictions

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

 

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.)
  9. 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.
  10. 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 Friday List: Our 2017 Predictions

the list

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.  Two years ago, we went 6-4, accurately predicting that the SEC would bring a landmark enforcement action against a private equity firm and that both Norm Champ (Investment Management) and Drew Bowden (OCIE) would resign.  Last year, we went 4-3-3.  We accurately predicted such events as the SEC bringing a gatekeeper case against a law firm and that the insurance industry would start offering CCO insurance.  We claim “ties” for predictions that were close: the SEC will commence an enforcement action against a robo-adviser (wrong, but Massachusetts came out strongly against robos), and the SEC will propose third party compliance reviews (wrong, but Mary Jo White said the proposal is on the desk of the Commissioners).

So, without further sandbagging, here are our 2017 predictions:

 

10 Predictions for the 2017 Regulatory Year:

  1. The new Administration will delay implementation of the DoL Fiduciary Rule.   Although we think the Rule will ultimately take effect with some modification, it may take some time.  Most agree with the basic principle of protecting retail IRAs, but many industry participants are struggling with adequate and expeditious implementation.
  2. The SEC will propose third party RIA compliance exams.  Paul Atkins, who leads the transition team on financial regulatory issues, works with Dan Gallagher, who, as an SEC Commissioner, initially suggested this concept to ensure more reviews of registered investment advisers.
  3. Whistleblowers: The Office of the Whistleblower will survive, and there will be more claims and more retaliation cases.  We believe this is one part of Dodd-Frank that will survive because everybody gets behind blowing the whistle on corporate wrongdoing.
  4. The SEC will raise the threshold for private fund registration above $150 Million.  Both Democrats and Republicans can agree to this change to Dodd-Frank and which has been supported by Barney Frank himself.
  5. FINRA will become the primary regulator for retail advisers and brokers.  As the SEC backs away from retail enforcement and examination efforts, look for FINRA to step into the regulatory void.
  6. State regulators will bring 2-3 precedent-setting enforcement actions.  Consistent with the FINRA theme, look for Spitzer-esque regulators to flex their regulatory muscles if the SEC shrinks away.
  7. SEC penalty caps will increase.  This is a component of the Rep. Hensarling-sponsored CHOICE Act (aimed at Dodd-Frank reform) with which both parties agree.
  8. The SEC will focus on prosecuting individuals, not firms.  Mr. Atkins has opposed large corporate penalties that ultimately hurt shareholders.  However, the SEC will continue its policy of prosecuting individuals.
  9. There will be an acceleration of outsourcing non-core functions.  As scale becomes increasingly important, look for firms to find new ways to focus on their core competencies and outsource non-core functions.
  10. Firms and regulators will struggle with bond pricing.  The more volatile bond markets resulting from changes in macro-economic policy will make life difficult for those responsible for bond pricing.