To that end, SEC staff is already seeing the broker-dealer and mutual fund industries begin to make changes to accommodate the Department of Labor’s (DOL) fiduciary rule, which has only partially taken effect, Clayton reported. Industry actions include:
Increasing compliance resources and efforts (with emphasis on disclosure, documentation and training with respect to costs and rollover recommendations);
Increasing the use of robo-advice, and;
Re-evaluating and changing the types of products, accounts and related fees offered to retirement investors, in light of the DOL’s “Best Interest Contract Exemption, which requires that firms shift some or all retirement accounts to level-fee advisory accounts.
SEC staff also “understands” that mutual fund complexes are also working to accommodate broker-dealer efforts to level compensation across similar types of products in response to the DOL rule, Clayton said. Fund company approaches include issuing clean shares, free of sales loads and charges, which would allow brokers to set their own commissions which would be paid directly by investors. Funds are also ramping up the issuance of “T-shares,” or transaction shares, which carry uniform sales charges across all fund categories.
Because of the tremendous impact of the DOL’s rule on the market and regulation, “we are engaging expeditiously and constructively with our colleagues at the DOL to best serve the interests of investors,” Clayton said.
The SEC commissioner is also seeking comment on investment advisor standards of conduct, as the commission seeks to ensure its standards are “clear and comprehensible to the average investor, consistent across retirement and non-retirement assets and coordinated with other regulatory entities, including the DOL and state insurance regulators,” Clayton told lawmakers.
“To date, we have received over 150 comments from investors and the industry, expressing a range of views. I also have personally met with various Main Street investor and industry groups and have found those conversations beneficial,” as the SEC evaluates its next steps, the SEC Chairman added.
“While this has been a very positive step, more needs to be done to continue to increase investment advisor examination coverage levels, while at the same time being careful to avoid decreasing examination quality. To that end, the SEC will continue to explore additional efficiencies and improvements to our risk-based examination program. One way to achieve this is through the continued leveraging of data analysis. We have developed tools that scan an array of data fields to help us analyze and identify potentially problematic activities and firms. This allows us to make better decisions concerning which firms to examine and appropriately scope those examinations, among other things. I expect that for at least the next several years we will need to do more to increase the agency's examination coverage of investment advisors in light of continuing changes in the markets.”
In addition to fiduciary standards, the SEC is also ramping up its cybersecurity initiatives, after discovering its EDGAR system was hacked, leading to illegal trading advantages. To that end, the SEC announced the creation of a Cyber Unit that will focus on targeting cyber-related misconduct and the establishment of a retail strategy task force that will implement initiatives that directly impact retail investors, the agency announced today.
To accomplish the SEC's goals, Clayton is asking Congress for an authorization of approximately $1.7 billion. “I do not make a request for additional funds lightly, especially in a tight budgetary environment. But after an evaluation of the SEC's capabilities and needs, I believe this request is necessary.”
The request would allow the agency to lift the hiring freeze implemented at the start of fiscal year 2017 and recruit professionals with key skills and market expertise in electronic trading, cybersecurity, retail investor fraud, investment advisor oversight and market analysis, Clayton said.