Regulatory Outlook | 09.15.21
SEC Stacks Investor Protection Deck
Gary Gensler spent Tuesday, September 14, getting customarily grilled by lawmakers who control his budgetary resources.
In prepared testimony, Gensler spelled out, in detail, his expansive agenda as chairman of the U.S. Securities and Exchange Commission.
Retail trading practices, the rise of cryptocurrency and disruptive technologies all sit atop his “to be prioritized” list aired during the chief financial regulator's appearance before the Senate Banking Committee, Gensler’s first such appearance as SEC chairman.
The laser-like focus on investor protection had already been made abundantly clear – three weeks earlier. That’s when Gensler announced he had appointed Barbara Roper, director of investor protection for the Consumer Federation of America, as his senior advisor.
Investor protection as an SEC priority – sure, that’s a given. And past SEC chiefs have not been shy about telegraphing their priorities. In 2017, former SEC Chief Jay Clayton essentially declared open season on initial coin offerings (ICOs).
But the tapping of Roper is unprecedented in terms of putting retail investor protection issues squarely in the center of the ring – like if a major food conglomerate signaled to the market an emphasis on candy-making by hiring Willy Wonka.
Look now for revived scrutiny on an issue that has sat atop the financial services industry for more than a decade: clarification of advisory-related supervision.
Further Defining 'Best Interest'
Reforming broker and advisor regulation “should be a top priority because it affects the most vulnerable investors,” Roper said back in April, writing a customary public letter to the SEC which in recent years has served as a plea to regulators to revisit issues thought to be settled via Regulation Best Interest.
Known as “Reg BI,” the set of care-standard governance rules, years in the making, took effect in June of 2020.
While it doesn’t need to be altogether scrapped, Roper has stated, Reg BI is “too weak.”
"The need for a fresh approach to this issue remains undiminished,” she said.
A 35-year veteran of the consumer-advocacy group, Roper has been a vociferous, dogged proponent of investor protections.
In particular, she has pounded the table about the standards that apply to investment professionals giving advice and recommendations.
Roper’s appointment likely signals regulatory changes afoot in several areas — namely Reg BI, said Ron Rhoades, associate professor of finance at Western Kentucky University and director of its personal financial planning program.
Rhoades told ThinkAdvisor Roper is likely to examine how ‘best interest’ can be defined,” Rhoades said.
Expect several, significant draft rules in 2022, he added.
A More Fiduciary-Centric SEC?
Knut Rostad, president of the Fiduciary Institute, said there is still too much ambiguity clouding the lines separating advice from trading and sales.
A time of further clarity could be close at hand.
The new regulatory regime signals new aspirations, Rostad said.
"Rules, guidance and enforcement can make this the most fiduciary-centric SEC in modern history,” he said.
For his part, Gensler has thus far gone out of his way to stress his clarity bent, and that was even before tapping Roper.
In May, Gensler, during remarks at 2021 FINRA Annual Conference, was hardly coy: "Best interest means best interest," he said.
In other words, if you’re asking a lawyer if something is over the line, Gensler explained, "maybe it is time to step back from the line."
Form CRS At The Fore
"Reg BI" easily rolls off the tongue, and has become a catch-all term, but it is only one component of a four-pronged advice-standards package adopted by the SEC.
Another key area is the Customer Relationship Summary, or Form CRS.
According to the SEC, Form CRS was implemented to give clients a transparent view of specific, pertinent facts about the services they offer (and compensation arrangements). The document, limited to two pages for individual firms, is something that SEC-registered brokers and financial advisors are now required by law to provide to their retail clients.
This past July, the SEC announced that 21 investment advisors and six broker-dealers agreed to settle charges that they failed to timely file and deliver their relationship summaries to their retail investors.
In March, an SEC exam team identified hundreds of firms that the agency believed should have filed a Form CRS – but didn’t.
Predictive Data Concerns
Another area of focus in terms of regulation of the wealth management and advisory industry has to do with new data science technology.
“Policymakers must consider rules for the use of predictive data analytics,” Gensler told the Senate committee on Sept. 14.
Trading platforms, he said, have new capabilities to tailor marketing and products to individual investors. While this can increase access and choice, such differential marketing and behavioral prompts raise new questions about potential conflicts within the brokerage, wealth management, and robo-advising spaces, “particularly if and when brokerage or investment advisor models are optimized for the platform’s revenue and data collection.”