SEC outlines 2016 priorities

Many in the retirement industry have urged the Securities and Exchange Commission to come out with its own fiduciary rule before the Department of Labor releases its much-anticipated rule regarding who is and isn’t a fiduciary when it comes to investment advice.

Many believe that the SEC has always overseen broker-dealers and IRAs and therefore should continue to do so without the intervention of the DOL.

As the DOL has gone back and forth with industry representatives and investors on its new rule, including hearings and comments, it has become clear there is a political division when it comes to who should regulate the investment advice industry.

Also see: “Final fiduciary rule rests in DOL’s hands.”

In its proposed final fiduciary rule, the DOL said that it would treat advisers to IRAs in the same manner as workplace-sponsored retirement plans. It doesn’t throw out the broker-dealer model, but makes it much more difficult for anyone giving investment advice to clients to collect commissions or other fees for recommending different investment vehicles.

Currently, broker-dealers are subject to a suitability standard, meaning they can recommend investments in which they would benefit as long as they believe it is suitable for their client. According to the SEC, in making this determination, the broker must consider a client’s income and net worth, investment objectives, risk tolerance and other security holdings.

The DOL has said that it has worked closely with the SEC on a new fiduciary standard, but one of the SEC’s five commissioners, Daniel Gallagher, wrote in a letter to the DOL in July that the “DOL should scrap the Fiduciary Proposal and start working in a meaningful way with the Commission to address the DOL’s concerns about broker fees for retirement accounts. The Fiduciary Proposal will harm investors, plain and simple, and an SEC rulemaking under Section 913 of Dodd-Frank will only make a bad situation worse.”

Also see: “Does the DOL’s fiduciary rule favor fee-based brokers?”

Dodd-Frank was a financial reform law that was passed in 2010 that gave the SEC the authority to make a rule that would change how retail investment advice is given. Currently, broker-dealers have to meet suitability provisions but they don’t have to act in the best interest of their clients like registered investment advisers. They also are required to reveal any conflicts of interest to their customers, in certain circumstances.

Gallagher said that the government needs to “end the rampant nanny-statism that is motivating both of these rulemakings and instead focus on a disclosure regime that empowers investors and allows brokerage firms to continue to offer a menu of services to all types of investors, not just the affluent.”

Mary Jo White, chair of the SEC, has said that the endeavor is very important to the agency. The SEC is expected to release its own fiduciary rule in the fall of 2016, well after the DOL’s final rule is expected to be released in the spring.

The SEC released this week its Examination Priorities for 2016 for its Office of Compliance Inspections and Examinations (OCIE), a division that promotes compliance, attempts to prevent fraud, identify risk and inform policy.

Also see: “Top 30 401(k) plans.”

Its top priority for 2016 is to examine matters of importance to retail investors, including investors saving for retirement.

“Retail investors of all ages face a complex and evolving set of choices when determining how to invest their money,” according to the SEC. “Additionally, as investors are more dependent than ever on their own investments for retirement, the financial services industry is offering a broad array of information, advice, products, and services to retail investors to help them plan for, and live in, their retirement years.”

Last year, the SEC launched a multi-year examination initiative called ReTIRE that focused on SEC-registered investment advisers and broker-dealers and the services they offer to investors with retirement accounts.  

As part of the ReTIRE initiative, the SEC will continue to examine the reasonable basis for recommendations made to investors, conflicts of interest, supervision and compliance controls and marketing and disclosure practices in 2016.

Also see: “Everything you need to know about robo-advisers.”

The SEC also will take a closer look at exchange-traded funds in 2016, focusing on “sales strategies, trading practices and disclosures involving ETFs, including excessive portfolio concentration, primary and secondary market trading risks, adequacy of risk disclosure, and suitability, particularly in niche or leveraged/inverse ETFs,” the SEC said.

It will continue to review regulated entities’ supervision of registered representatives and investment adviser representatives in branch offices of SEC-registered investment advisers and broker-dealers, including data analytics to identify registered representatives in branches that appear to be engaged in potentially inappropriate trading.

The SEC plans to continue examining investment advisers and dually registered investment adviser/broker-dealers that offer retail investors a variety of fee arrangements, including asset-based fees, hourly fees, wrap fees and commissions. It will determine if these recommendations are in the best interest of the investors.

It will also assess the suitability of variable annuity sales to retail investors.

Also see: “IRI to focus on fiduciary rule, 401(k) enrollment.”

“These new areas of focus are extremely important to investors and financial institutions across the spectrum,” said White. “Through information sharing and conducting comprehensive examinations, OCIE continues to promote compliance with the federal securities laws to better protect investors and our markets.”

Paula Aven Gladych is a freelance writer based in Denver.