There’s never a dull moment on the financial regulatory front, and this year will be no exception with a number of issues on both the front and back burners that could potentially impact financial advisors across various industry channels.
At the Financial Services Institute’s OneVoice conference Tuesday in Orlando, top officials at the Financial Industry Regulatory Authority, the U.S. Securities and Exchange Commission and the North American Securities Administrators Association sat down with FSI president and chief executive Dale Brown to talk about their top priorities in 2016.
FSI, an advocacy group representing more than 100 independent advisor and broker-dealer firms and 35,000 financial advisor members, has been beating the drum in opposition to perhaps the most contentious issue on the regulatory docket this year: The U.S. Department of Labor’s proposal to apply a fiduciary standard to all financial advisors providing investment advice for a fee to a retirement account plan or participant.
FSI believes that DOL’s efforts to redefine investment advice under the Employee Retirement Income Security Act of 1974, or ERISA, will subject its member firms, many of whom abide by the suitability standard, to a fiduciary standard that will add compliance costs making it too costly to provide advice to retirement plans with small accounts.
Brown asked the regulatory officials on the panel whether they foresee DOL’s proposal potentially conflicting with their own regulatory mandates.
“The answer to that is I don’t see it impacting [the SEC],” said Stephen Luparello, director of the SEC’s division of trading and markets. “I think the Chair [SEC Chairwoman Mary Jo White] has expressed her personal desire to step into the fiduciary conversation and develop a rule that creates a single standard of care for broker-dealers and investment advisors. At the same time, she’s talked about the fact that the DOL and SEC have different statutory mandates and different responsibilities, and that would permit those two regulatory efforts to [be on] separate tracks.
“I clearly think there are the possibilities of certain interpretive issues that we would need to deal with if and when DOL finishes their rulemaking, and we’ll address it at the time," Luparello continued.
Judith Shaw, NASAA president and Maine Securities Administrator, said her group that represents state securities administrators had raised a couple of issues with the DOL through its comment letters, one of them being enforcement remedies.
“The enforcement remedies available to the DOL are more limited than those available to the states,” she said, adding that NASAA made sure the DOL was aware that it was important that state securities regulators maintain their authority to pursue a registered person who might engage in some sort of issue involving an IRA or other transaction that’s covered by an ERISA fiduciary duty.
Robert Colby, FINRA’s chief legal officer, said the brokerage regulator also expressed its view of the proposal to the DOL.
“We filed a comment because the ERISA fiduciary duty isn’t a common fiduciary duty of what investment advisors live with, and we wanted to make the DOL aware of what we thought the implications would be in applying that particular type of fiduciary duty to the securities industry,” he said.
Seniors
Elsewhere, the regulators said the issue of abuse of senior investors is in their crosshairs. “It’s a critical issue for all of us to be addressing and a wonderful opportunity for all of us in this room to be able to find a way to cooperate and collaborate around this issue,” Shaw said.
Regarding NASAA’s investment advisor examination programs, Shaw said they continue to find issues regarding fees, registrations and conflicts of interest. “These are issues we look at with broker-dealers as well.”
Addressing the broker-dealers among the packed room during this general session gathering, Shaw noted, “Important for all of you to be thinking about is how you supervise outside business activities for those investment advisors [affiliated with your firm]. We try to use our resources judiciously in the states, and we recognize that we have FINRA looking at the broker-dealers, so as a general rule we don’t examine broker-dealers as frequently as our own state-registered investment advisors. But it’s also not unusual for a state regulator to go into one of your firms where there is this outside business activity and take that as an opportunity to examine the broker-dealer and the investment advisory activity at the same time.
“Common deficiencies with our investment advisors are books and records violations, and frankly that’s one of the common deficiencies we see at broker-dealers as well,” Shaw added.
She said NASAA’s other examination priorities include new products and point-of-sale issues, which she says state administrators always look at regarding broker-dealers.
Regarding specific products, Shaw said the top five issues on NASAA’s watch list include Ponzi schemes that ensnare investors seeking yield in the current low-yield environment. Other priorities comprise Regulation D Rule 506 private offerings, which Shaw said have been the source of a lot of enforcement actions; real estate, including non-traded real estate investment trusts as well as real estate investments involving promissory notes; Internet fraud entailing social media and crowdfunding; and oil and gas offerings.
Culture
Colby said that along with working with states in crafting rules to protect senior citizens, other FINRA priorities of importance to FSI members include a proposal dealing with recruitment, compensation and account transfer disclosures. It’s also working on a fixed-income disclosure proposal to disclose the mark ups charged by firms conducting trades in those securities.
Colby said FINRA is undertaking a number of changes regarding its registration rules. One of those proposals would allow people to move to different functions within a firm and be able to maintain their license as long as they’re doing continuing education requirements while working in this new function.
In addition, Finra has proposed restructuring its qualification exam program, where existing qualification exams would be divided into a single core, or "essentials" exam, followed by a "top-off" exam, such as the Series 6 or Series 7.
Colby said the aim is to reduce redundancy in the current exam program.
Dale Brown noted that FINRA’s 2016 exam priorities letter mentioned a focus on analyzing firm culture. “How do you examine for culture?” he asked Colby.
“Culture is the attitude of what a firm brings in how it conducts its business,” he replied. “It’s usually top-down; it’s the leadership in how they communicate. We’ll be looking at the frameworks for deciding, disseminating and instilling the firm’s culture through the organization.
“So we look to see how the firm is handling conflicts,” he continued. “Are they following up on violations to see why they occurred and what they should be doing differently? We look to see what sort of role model the leadership of the firm is setting. We’re going to begin with the large firms first because they typically have a pretty well developed thought process on this, and we’ll try to understand what they have structured and how they structured it. In part, what we’re trying to do is bring the thinking that’s been done already and instill it more broadly to the industry.”