By: Anya Coverman, Senior Vice President of Government Affairs and General Counsel at the Institute for Portfolio Alternatives
To enhance investor protection and preserve the ability of all financial professionals to serve the needs of their clients, the Trump Administration’s Securities and Exchange Commission (SEC) established Regulation Best Interest (Reg BI). The regulation, a successor to the Obama Administration Department of Labor’s vacated fiduciary rule, established a “best interest” standard of conduct that aims to bring clarity and transparency to retail investors.
Throughout the year, as President Biden’s Administration has taken the reins on implementing the national fiduciary standard, our industry has been watching developments from Chairman Gary Gensler’s SEC and Chairman Marty Walsh’s Department of Labor (DOL) closely.
What we’ve learned thus far, in the short term, is that Gensler’s outlook on Reg BI is unlikely to lead to new rule changes but instead use SEC examinations, enforcement actions and additional guidance to ensure compliance. Based on past precedent, it’s relatively unusual to see enforcement activity this close to a new rule’s adoption, especially one on the scale of Reg BI. We expect to see significant announcements on what they are finding through examinations and what they view as missing from industry’s efforts to comply.
Still, Gensler has not made his intention or desire to make changes to Reg BI clear. As the year comes to an end, the appointment of Barbara Roper – one of the loudest advocates for a stricter fiduciary standard – to a senior advisor post within the SEC has been the biggest indicator to potential changes ahead.
Preparing for DOL Action
At the DOL, we anticipate further regulatory action which may impact the Investment Advice Exemption, rewrite of the five-part test that is used to determine if an investment communication subjects the communicator to ERISA’s fiduciary standards, and substantially revise or revoke other existing exemptions.
Our industry strongly supports the SEC’s Reg BI, to protect investors and preserve the ability of financial advisors to serve the needs of their clients. Reg BI has thoughtfully increased transparency and provided clarity for retail consumers across the financial industry by establishing a higher standard of care rules for financial professionals.
Despite the significant impact of Reg BI, we haven’t seen the end of fiduciary standard regulation. There are multiple fronts waxing and waning at different speeds. President Biden’s DOL is expected expand the scope of what entities and distribution channels are subject to ERISA’s fiduciary rules. Specifically, DOL has indicated that they anticipate issuing a new definition of what constitutes fiduciary “investment advice”. In connection with this, DOL is likely to make changes to the exemptions that fiduciaries rely upon when advising individuals on investment products.
When the DOL’s Fall 2021 agenda is made public, likely within a couple of weeks, it will provide further clarity on the status of work on this new fiduciary rule. While the DOL has issued a temporary delay of the enforcement effective date for Prohibited Transaction Exemption 2020-02, we expect that enforcement will be on the horizon in early 2022.
As we look ahead to next year, it’s not unreasonable to assume that the DOL will draft a rule more in line with the original rule proposed by President Obama’s DOL before it was vacated in 2018. This could be the beginning of another round of the same process.
The Final Fiduciary Frontier: States to Watch
The North American Securities Administrators Association (NASAA) and individual states are also leading their own regulatory efforts to devise a wide range of additional fiduciary regulations. As the federal election season picks up in 2022, we’ll likely see more regulatory, and notably state-level, activity.
This Spring, Massachusetts Secretary of the Commonwealth William Galvin filed an administrative complaint against Robinhood, alleging the company aggressively marketed to inexperienced investors and failed to serve their customer’s best interest – the first high-profile enforcement action at the state level using the Massachusetts rule adopted in 2020. As part of the complaint, Galvin’s office asked that Robinhood’s registration as a broker-dealer in the state be revoked to prevent the company from doing business there.
Beyond Massachusetts, New Jersey is considering similar regulations that are not yet final. Governor Phil Murphy issued an executive order delaying the final fiduciary rulemaking due to the enduring COVID-19 pandemic. However, if implemented, New Jersey’s fiduciary rule is considered by many as one of the most stringent among the handful of states that have proposed fiduciary standard rules.
In New York, recent legislation promulgated the First Amendment to Insurance Regulation 187, which requires sellers of now life insurance, as well as annuities, to act in the best interests of their customers and appropriately address the insurance needs and financial objectives of the consumer. Earlier this year, a separate bill mandating greater levels of disclosure by non-fiduciaries failed to pass. The ongoing conversation around expansion of this rule is something we’ll continue to watch closely into next year.
Our Industry Plays a Critical Role in Ensuring Policy Delivers Clarity, Transparency and Access to Investors
It’s critical that our industry continues to engage in constructive dialogue about the value of alternative investments. We firmly believe that there is no place in our industry for misinformation and manipulative or deceptive practices when recommending any investment or alternative asset – but there are reasons for concern that ongoing regulatory efforts put this at odds with access to portfolio diversification.
One of the areas of top concern is NASAA’s recent release of the 2021 Reg BI Phase Two Report by its Regulation Best Interest Committee, following its 2020 Reg BI Phase One Report. After reviewing the results, many were deeply concerned about flaws and biases in the survey process, in particular with regard to alternative products. The IPA has, and will continue to, express these concerns to NASAA and individual states along with our coalition partners.
As this conversation continues across many fronts, our industry must continue to advocate for rules and regulations that provide clear and transparent access to alternative investments. To achieve this goal, it will continue to take our consistent dedication and time, through comment periods and debates, to ensure our industry can provide all investors with important portfolio diversifying investment options.
Anya Coverman is senior vice president of government affairs and general counsel at Institute for Portfolio Alternatives where she leads all public policy and advocacy efforts.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.