The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) this past summer denotes the codification of a new era of regulation focused on promoting transparency and accountability. Of great interest will be the roadmap that Congress has established for regulators, centering on three essential categories most relevant to advisers:
- Professional accountability and transparency,
- Professional oversight and
- U.S. Securities and Exchange Commission (SEC) accountability and transparency.
A closer look at specific provisions in the legislation sheds more light on these categories and reveals an extremely aggressive regulatory agenda.
Professional Accountability and Transparency
Several provisions in the Dodd-Frank Act center on professional conduct and disclosures in an effort to improve investor protection measures:
Improved access to information on investment intermediaries. Included in the agenda to improve disclosures and information available to investors is a requirement for the SEC to study and recommend ways to improve investor access to registration information, including disciplinary-related information, about broker-dealers and investment advisers.
- Broker-dealer and investment advisor standards of conduct. The SEC is already engaged in a study of the effectiveness of current standards of care for investment intermediaries who provide advice to retail investors. Once the SEC concludes its study and reports its findings to Congress this January, the agency will likely exercise its authority to propose formal rules for both advisers and brokers requiring that they “act in the best interest” of investors when providing personalized investment advice.
- Investor financial literacy. A requirement for the SEC to study financial literacy is in reality a part of a larger agenda related to improving disclosures for investors. In particular, under the mandate to assess the existing financial literacy level of retail investors, the SEC must identify:
- Ways to improve disclosures to investors about investment products and services;
- The most useful information that retail investors need to make informed financial decisions; and
- Ways to increase transparency of expenses and conflicts of interests in investment transactions.
Professional oversight was a hot topic during the debate of the Dodd-Frank Act and the final provisions of the legislation reflect the complicated and differing issues related to oversight.
- New threshold for federal registration of investment advisors. Now that the threshold for federal registration of investment advisers has been raised to $100 million and scheduled to take effect next summer, the SEC and state regulators are on a tight schedule to coordinate efforts on “the switch” of oversight and are expected to begin providing guidance to advisers later this fall. The biggest impact on advisers making the switch next year could be an immediate knock on their door from state regulators who will want to ensure advisers have been subject to a recent examination.
- Enhancing investment advisor examinations. Although it appears to be premature in light of the impending switch for many advisers to state registration, the SEC nonetheless is tasked with completing a study on enhancing the oversight of investment advisers, including whether a self-regulatory organization (SRO) is needed. Many are viewing this provision as an open door for future oversight by FINRA, but at this point additional Congressional action would be needed for such aresult.
- Financial planners. Lobbying by the Financial Planning Coalition paid off in the form of a mandated Governmental Accountability Office (GAO) study, which will focus on identifying the appropriate regulatory structure for those professionals who engage in financial planning or hold themselves out as financial planners. Currently, there is no established regulatory oversight for these professionals as a group separate from broker-dealers or investment advisers. The real impact of the results of this study is unclear at this time given that Congressional action would likely be needed to transform oversight of financial planners.
SEC Accountability and Transparency
Finally, the regulatory agency tasked with overseeing much of the impending reform will itself be subject to additional scrutiny over the next few years.
- Oversight of national securities associations. The GAO must evaluate the SEC’s oversight of national securities associations, such as the Financial Industry Regulatory Authority (FINRA). The results of the study will likely provide interesting color and contrast to results of the SEC’s own study with regard to whether an SRO is needed for investment adviser oversight, as well as the independent study (discussed below) on the SEC’s structure and operations.
- SEC organizational study. Despite the expanded authority that the SEC has been provided with by the Dodd-Frank Act, Congress has also put the agency on notice that it is still on the hook for previous failures. Accordingly, an independent consultant will be engaged this fall to perform a review of the agency’s internal operations, structure, funding and the need for comprehensive reform of the Commission, including the agency’s relationship with and reliance on SROs.
- SEC funding. Although the SEC did not gain self-funding as it had requested, it did gain greater certainty with regard to its budget, which is set to double by 2015 and access to additional resources through a “reserve fund.” It still remains to be seen whether the additional budgetary resources will be enough for the agency to keep pace with industry changes given the large amount of studies and rulemakings it must complete and its expanded authority in areas such as hedge fund and rating agency regulation. What is clear, though, is that Congress will continue to have a certain degree of control over the agency’s resources and will use that control to monitor the accountability of the SEC.
In addition to what is required under the Dodd-Frank Act, the SEC has made clear that it also intends to complete any initiatives started since Chairman Mary Schapiro took over the reins of the agency in 2009. The recent adoption of changes to Form ADV Part 2 and the proposal to reform “12b-1 fees” are a clear illustration. Advisors can expect the SEC and other regulators throughout Washington to continue to move forward at a fast and aggressive pace and should stay engaged as much as possible in the regulatory process. Of particular note is the SEC’s recent announcement that it is dedicated to providing an open process while it completes the studies and rulemakings mandated under the Dodd-Frank Act. This marks a unique and historic opportunity for practitioners to weigh in and provide thoughtful remarks on their experience and how regulations should be written to both protect investors and ensure advisers can operate in a fair and practical manner.
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Kristina Fausti, JD, is director of Legal and Regulatory Affairs at the Bridgeville, PA-based consulting firm Fi360. Fausti provides subject-matter expertise to the fiduciary professional designation courses and software tools developed by Fi360, acts as legal liaison to outside counsel and serves in a compliance role in the organization. Prior to joining Fi360, Kristina served for over four years as a special counsel in the Office of Chief Counsel of the Division of Trading and Markets at the SEC and specialized in broker-dealer regulation. Prior to that, she was an associate with Troutman Sanders LLP in its Washington, D.C. office for two years and specialized in federal energy regulation.