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Clayton slims down SEC agenda, looks for more wins

The SEC is on track to finalize its standards of conduct for investment advisors and brokers next year, Chairman Jay Clayton indicated on Wednesday, calling those rules "a very important and long overdue initiative."

Clayton is also warning advisors and other financial professionals to brace for market turbulence that could emerge from the U.K.’s exit from the European Union and the upcoming abandonment of the Libor benchmark that underlies many of the popular funds advisors rely on as a staple of their portfolio construction.

In a speech on the SEC's priorities for 2019, Clayton also signaled cybersecurity will remain at the top of the agenda, promising that examiners will press advisors and brokers on areas such as risk governance, access controls and data protection.

Clayton called the advisor and broker regulations "a key priority," touting the seven town-hall meetings commissioners and staffers held to gather input from the everyday investors the rules are intended to protect.

Taking a step back from the SEC's regulatory agenda, Clayton is also cautioning advisors to keep in mind three macro risks to the market that he expects to dominate the years ahead: cybersecurity, Brexit and Libor.

"It is clear, based on these discussions, that we have the right perspective, namely, that the core obligations of investment professionals — and mandatory plain language disclosures —should match reasonable investor expectations," Clayton said in prepared remarks.

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Joe Ratterman of Bats Global Markets Inc., Nasdaq OMX Group Inc arrive for a meeting at the Securities and Exchange Commission in Washington, D.C., U.S., on Monday, May 10, 2010. The chief executive officers of the biggest U.S. stock markets were called to a meeting at the U.S.Securities and Exchange to discuss last week’s selloff in equities, according to four people familiar with the situation. Photographer: Joshua Roberts/Bloomberg

Under Mary Jo White, his immediate predecessor, Clayton said that the commission's regulatory agenda had become too "aspirational." In 2016, 32 rules appeared on the agenda, but fewer than a third were ultimately adopted. Many of those initiatives stemmed from legislative directives included in the Dodd-Frank bill, Clayton acknowledged. But he is staking out an approach marked by fewer novel rulemakings. And those initiatives that do appear on the commission's docket, he aims to complete. In the coming year, Clayton says that he is hoping to conclude 80% of the items presently on the regulatory agenda.

Some of the sharpest criticism of the SEC's investment advice proposal has come from consumer advocates who see the provisions relating to brokers continuing to permit conduct that they say is harmful to investors. So instead of applying an advisor-like fiduciary duty to broker-dealers, the proposed Regulation Best Interest would do little to enhance the existing suitability standard that governs the brokerage sector. An advisory panel to the commission has recommended that it revise the regulation to encompass more of the spirit — if not the letter — of the fiduciary standard.

Clayton, however, has little interest in a wholesale overhaul of the regulation of the wealth management market.

"The proposed rules are designed to preserve retail investor access — in terms of choice and cost — to a variety of types of investment services and investment products, while giving investors the tools to select the type of relationship that is appropriate for their needs and in line with their expectations," Clayton said.

"We also must recognize that while the current framework needs improvement, it is extensive, and in many areas functions well for our Main Street investors, particularly as compared to other jurisdictions," he said.

Under Mary Jo White, his immediate predecessor, Clayton said that the commission's regulatory agenda had become too "aspirational." In 2016, 32 rules appeared on the agenda, but fewer than a third were ultimately adopted.

Clayton also indicated that he will pursue reforms to the proxy process, including, potentially, new regulations on the proxy advisory firms that advisors use to vote their clients' shares. A leading advisor trade group is asking officials to focus attention on the integrity of the voting process, rather than "the politically heated, but far less systemically important, subject of
proxy advisory firms."

"Investment advisors would face extreme difficulty if they were unable to use these services, especially those that relate to the administration of proxy voting," the Investment Adviser Association wrote in a letter to the leaders of the Senate Banking Committee, which held a hearing on the issue on Thursday. "We strongly object to efforts to restrict advisors’ use of these firms and to regulation that would make these firms' services more expensive for advisers and their clients and increase barriers to entry."

Taking a step back from the sometimes arcane items on the SEC's regulatory agenda, Clayton is cautioning advisors and brokers to keep in mind three macro risks to the market that he expects to dominate the years ahead: cybersecurity, Brexit and Libor.

Regarding cybersecurity, Clayton expects the commission to step up its examination and oversight role, including an increased focus on breaches at retail brokerages that could expose clients' personal information.

As for Brexit, Clayton worries that the market risks are underestimated and not well understood, but are already beginning to materialize.

"The actual effects of Brexit are likely to manifest themselves in advance of implementation dates and, based on corporate disclosures, some of those effects are upon us," he said.

The transition away from Libor, slated for 2021, poses a distinct — if underappreciated — risk to brokers and investment advisors and companies with exposure to the benchmark, Clayton warns, calling on firms to develop a plan for how they will handle the transition to a different rate, such as the Secured Overnight Financing Rate that U.S. regulators, including the SEC, are promoting as a Libor alternative.

"To be clear, a lot of progress has been made to facilitate the transition from Libor to SOFR," he said. "But I want to make sure that market participants are aware of the need to plan for this important transition, as a lot of the work will fall on them."

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