As SEC Chairwoman Mary Jo White prepares to
White’s departure, hardly surprising given the results of the presidential election, will leave government without having completed two critical initiatives: enacting a uniform standard that would extend the fiduciary responsibilities advisors face to broker-dealers, and setting up a structural framework for increased RIA examinations.
Publicly, White had identified both areas as key priorities, saying that brokers advising retail investors should be held to a best-interest standard of care, and declaring that the SEC's exam unit simply lacks the resources to effectively oversee the growing RIA sector.
But both of those issues, each with its own set of contentious points and political challenges, will now pass to White's successor, to the dismay of some champions for stronger regulations.
"The failure to adopt a uniform fiduciary standard for all investment advice, whether offered by brokers or advisors, is a major black mark for this administration, and one for which she bears significant responsibility," says Barbara Roper, director of investor protection at the Consumer Federation of America, a group that has advocated for strong fiduciary rules.
SEC spokespeople did not immediately respond to a request for an interview with White.
INDUSTRY RESHAPING IS CHALLENGING AND COMPLEX
Appearing before the House Financial Services Committee on Tuesday, the chairwoman reiterated her support for harmonizing the rules that govern broker-dealers and advisors, while also underscoring the challenges and complexities of crafting a framework that would reshape the brokerage industry.
"As I have stated previously, my evaluation of the differences in the standards that apply to advice under the federal securities laws has led me to conclude that broker-dealers and investment advisors should be subject to a uniform fiduciary standard of conduct when providing personalized investment advice about securities to retail investors," White said in her written testimony. "Ultimately, of course, the commission as a whole will decide whether to proceed with a rulemaking to implement a uniform fiduciary standard and its parameters."
An advisor's initial instinct when notified of a pending examination may be to worry or be nervous. We recommend that you take fear out of this process, though. Once you receive notification of a regulatory examination, stay calm and follow these seven steps.
On advisor exams, where observers generally agree that the SEC's current oversight is insufficient, Roper is more forgiving of White, laying the blame with members of Congress who kept in place budget restrictions that prohibited the commission from expanding its Office of Compliance Inspections and Examinations.
"For purely ideological reasons – since the SEC budget is fully offset by fees and doesn't affect the deficit – Congress chose to underfund the agency," Roper says. "That situation is likely to get worse, rather than better, in the coming years."
SEC’S FULL PLATE
For more than three-and-a-half years at the helm of the commission, White had a full plate owing to lingering mandates from the Dodd-Frank Act and competing pressures from lawmakers and other regulatory authorities organized under the Financial Stability Oversight Council, according to Duane Thompson, a senior policy analyst at fi360, a fiduciary training firm.
"My sense is that you'll never hear an SEC chair say this, but if you go back six years to Dodd-Frank, Congress couldn't resolve a lot of issues so they passed the buck to the regulators," Thompson says.
"Then White got pressure from FSOC to look at potential market risk posed by asset managers, not to mention flash-crashes, pressure from Congress to adopt rules for crowd-funding, and on and on," he says. "In recent years it seems the SEC chair has to wear a flak jacket every time she testifies at a congressional hearing."
White has taken some steps to improve advisor oversight, including shifting broker-dealer examiners over to the RIA field and hiring new examiners. Those moves have increased the number of OCIE staffers working in the advisor arena 20% since fiscal 2015, according to the commission.
“If you go back six years to Dodd-Frank, Congress couldn't resolve a lot of issues so they passed the buck to the regulators" – Duane Thompson
"I think that Chair White did a good job of working with the resources that she had at the commission to increase the number of enforcement actions and then also allocate additional resources to examinations,” says Marilyn Mohrman-Gillis, managing director of public policy and communications at the CFP Board.
Yet White's actions have not been able to address the advisor oversight question in a structural way. In fiscal 2016, she testified, the SEC was only able to examine 11% of registered advisors whose assets under management account for more than 35% of the entire sector. Proposals for expanding advisor exams have varied, but commission staffers had recently been exploring deputizing a third-party to help conduct practice exams.
White said on Tuesday that she had forwarded the recommendations of commission staffers to her two fellow commissioners for review. That she has been working only with two – rather than four – commissioners for almost a year has fueled political pressure not to move on any sweeping new initiatives before the empty slots are filled.
Rep. Jeb Hensarling, a Republican from Texas and the chairman of the Financial Service Committee, reiterated that concern at the hearing.
"As there are currently two vacancies at the commission," Hensarling said to White, "absent an emergency and given your current reputation and legacy, I would strongly urge you to respect the results of last week's election and resist the temptation to finalize any regulations ... in deference to the right of the incoming administration to set its own priorities upon taking office in January."
MISSED EARLY-TERM OPPORTUNITIES
An understaffed commission waiting out a lame-duck period ahead of a wholesale leadership transition is unlikely to take up a contentious issue like the fiduciary standard. But for fiduciary supporters like Roper, the situation puts into painful relief the opportunity that White had a few years ago after she announced her support for a uniform standard and could have pushed a rule through a divided but fully staffed commission.
"It seems we are far more likely to be defending the gains we've made rather than extending protections to all investment advice” – Barbara Roper
"While there's no question she faced entrenched opposition from the Republican commissioners, she had the votes she needed for a strong fiduciary rule early in her term and she either didn't prioritize getting it done or wasn’t willing to take the heat for pushing through a strong rule," Roper says. "After all, you've seen the kind of abuse DoL had to stand up to in order to complete its rule."
Roper suggests that the proposal for a third party to help the SEC with advisor exams (which she opposes) could be revived under a Donald Trump administration, though she cautions that it is "too early to tell."
The CFP Board and the Financial Planning Coalition, of which it is a member, will continue to advocate for more funding from Congress, or at least legislation that would authorize the commission to pay for more exams through user fees collected from registered advisors.
"Our positon is that the SEC should be fully funded through the appropriations process to increase examinations to once every four years," Mohrman-Gillis says. "If Congress is not going to fully fund the commission, we still believe that user fees for increased examinations is the best policy."
Roper sees a uniform fiduciary standard as something the incoming administration could act on, given some of Trump's populist campaign rhetoric about a so-called rigged system and the out-sized control that large firms wield over the legislative and regulatory process.
"If President-elect Trump was sincere when he pledged to make Washington work for ordinary citizens instead of special interests, it ought to be possible to make progress on the fiduciary issue," she says. "After all, it is hard to imagine an issue that more directly pits the interests of working Americans against power financial firms."
Roper adds that she is concerned by some of the candidates rumored to be in line for Trump administration positions. "It seems we are far more likely to be defending the gains we've made rather than extending protections to all investment advice.
"The biggest risk," she cautions, is that SIFMA and other groups representing the brokerage sector "will try to pass off a watered-down standard as progress."
FIDUCIARY IN NAME ONLY
Mohrman-Gillis couples the SEC's ongoing fiduciary work with the controversial rule enacted by the Labor Department applying fiduciary duties to advisors providing retirement advice, calling on the incoming administration to support both measures as important protections for middle- and lower-income investors.
"President-elect Trump can deliver on his promise to stand up for the forgotten American by enforcing the Department of Labor fiduciary rule and supporting an SEC rule to extend a fiduciary obligation to broker dealers," she says.
SIFMA issued a statement praising White as "a dedicated public servant" following the announcement of her resignation, but spokespeople for the group did not immediately respond to requests for a comment on its plans to lobby on issues such as the fiduciary standard.
Roper worries about the enactment of a lax standard of care that would essentially be fiduciary in name only, and worries that a future SEC could take action on the issue while "leaving in place the toxic conflicts that encourage harmful advice, adding a few meaningless disclosures, and calling it progress."
"That is something we would strongly oppose," she says.
