Securities and Enforcement Update

SEC Focusing on Investment Adviser and Broker-Dealer Standards of Conduct

September 29, 2017

On Sept. 26, 2017, Securities and Exchange Commission Chairman Jay Clayton testified before the Senate Committee on Banking, Housing and Urban Affairs for the first time since his confirmation. Although the testimony and hearing focused heavily on the recent revelation of a 2016 data breach involving the SEC’s EDGAR filing system, Clayton also reiterated the SEC’s continuing work to develop its own rules regarding investment adviser and broker-dealer standards of conduct.

As set forth in his published remarks, Clayton declared that the SEC has been reviewing its approach to investment professionals’ standards of conduct “for some time” and is seeking to “properly tailor an approach or package of approaches.” He detailed actions broker-dealers have taken to comply with the Department of Labor’s partially implemented fiduciary rule, including:

(1) increasing compliance efforts (such as enhancing documentation needed for cost and rollover requirements);

(2) increasing use of robo-advisers; and

(3) changing the types of products and accounts offered to retirement investors (such as shifting retirement accounts to level-fee advisory accounts).

Clayton also noted that mutual fund complexes are considering ways to accommodate broker-dealers’ efforts to ensure that compensation remains level across different types of products. In particular, he noted the emergence of new classes of mutual fund shares in response to the fiduciary rule. “Clean shares” do not have sales loads or annual 12b-1 fees, instead allowing brokers to set their own commissions and thus increase transparency for investors. “T-shares,” also known as “transaction shares,” are low-load funds with uniform sales charges across all fund categories

Although the SEC and the DOL have different statutory mandates and jurisdictions, Clayton explained, actions taken by one agency regarding standards of conduct have a significant effect on the entities and marketplace regulated by the other agency. Accordingly, he emphasized the importance of ensuring that the SEC understands the effects of the DOL’s fiduciary rule and works “closely and constructively with DOL to implement appropriate standards of conduct for financial professionals who provide advice to retail investors.” 

Clayton noted his June 1, 2017, request for public input on standards of conduct and the key principles of “clarity, consistency and coordination” that will guide the SEC’s approach. He emphasized that standards “should be clear and comprehensible to the average investor, consistent across retirement and non-retirement assets and coordinated with other regulatory entities, including the DOL and state insurance regulators.”

McGuireWoods’ securities and enforcement attorneys will continue to monitor and report on important developments for broker-dealer and investment advisors. For further information, please contact the author or any member of the McGuireWoods team.