Report Reveals Progress on Recommendations to the SEC

The SEC is bumping up staff for investment adviser examinations, but actions on a fiduciary rule and TDF disclosures are still pending.

The Securities and Exchange Commission’s (SEC’s) Officer of Investor Advocate report about objectives for Fiscal Year 2017 discussed Investor Advocate Committee (IAC) recommendations to the SEC and the SEC’s response to those recommendations.

In 2013, the IAC recommended that the SEC request legislation from Congress that would authorize the commission to impose user fees on SEC-registered investment advisers to provide a scalable source of funding for more frequent compliance examinations of advisers. The IAC asserted that the examination cycle for SEC-registered investment advisers was “simply inadequate to detect or credibly deter fraud.”                    

Though it has never made a statement requesting user fees, the SEC says it has made funding for increased coverage of investment adviser exams a top priority every year since FY 2015. Each year, the commission has requested funding to hire additional examiners in the SEC Office of Compliance Inspections and Examinations (OCIE): the FY 2015 Budget Request called for funding to support an increase of 316 OCIE examiner positions; the FY 2016 Budget Request, an increase of 225 OCIE examiners; and the FY 2017 Budget Request, an increase of 127 OCIE examiners.

In addition to adding new examiners when new resources become available, OCIE is in the process of converting some staff from its broker/dealer examination program to the investment adviser/investment company program, with the goal of increasing staff for the latter by roughly 20%.

NEXT: Broker/Dealer Fiduciary Rule

Also in 2013, the IAC adopted a set of recommendations encouraging the SEC to establish a fiduciary duty for broker/dealers when they provide personalized investment advice to retail investors.

The IAC suggested that to accomplish this objective, the SEC should narrow the exclusion for broker/dealers within the definition of an “investment adviser” under the Investment Advisers Act of 1940. As an alternative, the committee recommended the adoption of a rule under Section 913 of the Dodd-Frank Act to require broker/dealers to act in the best interests of their retail customers when providing personalized investment advice, with sufficient flexibility to permit certain sale-related conflicts of interest that are fully disclosed and appropriately managed.

In addition, the IAC recommended the adoption of a uniform, plain English disclosure document to be provided to customers and potential customers of broker/dealers and investment advisers which would disclose information about the nature of services offered, fees and compensation, potential conflicts of interest, and the disciplinary record of the broker/dealer or investment adviser.

In March 2015, SEC Chair Mary Jo White announced her belief that broker/dealers and investment advisers should be subject to a uniform fiduciary standard of conduct when providing personalized securities advice to retail investors. In Congressional testimony, she stated that she would soon begin discussing the issue with fellow commissioners, and that she had asked SEC staff to develop rulemaking recommendations for commission consideration. Further SEC action is pending.

NEXT: TDF Disclosures

The IAC adopted recommendations for the SEC to revise its proposed rule regarding target-date retirement fund names and marketing.

The package of five IAC recommendations pertained to a 2010 SEC proposal that would, among other things, require marketing materials for target-date funds (TDFs) to include a table, chart, or graph depicting the fund’s asset allocation over time (i.e., an asset allocation glide path). As either a replacement for or supplement to the SEC’s proposed asset allocation glide path illustration, the IAC recommended that the commission develop a glide path illustration that would be based on a measure of fund risk. To promote comparability between funds, the IAC recommended the adoption of standard methodologies to be used in glide path illustrations.

In addition, the IAC urged the SEC to require clearer disclosure about the risk of loss, the cumulative impact of fees, and the assumptions used to design and manage the funds.

On April 3, 2014, the SEC reopened the comment period on the proposed rule in order to seek public comment on the IAC’s recommendations to adopt a risk-based glide path illustration and the methodology to be used for measuring risk. The comment period closed June 9, 2014, and a final rule has not yet been adopted.

The report on objectives is here.