Coming Soon: Regulations for Uniform Fiduciary Standard

Broker-Dealer Compliance + Regulation

In testimony before the House Committee on Financial Services on March 24, 2015, SEC Chair Mary Jo White said that she supports a uniform fiduciary standard of conduct for broker-dealers and investment advisers that provide personalized securities advice to retail customers.  She detailed plans for rules concerning enhanced risk monitoring and regulatory safeguards for asset managers.

Uniform fiduciary standard

White testified that she asked the SEC staff to develop rulemaking recommendations for the SEC to consider, taking into account the SEC staff recommendations contained in a 2011 report to Congress on this issue, and the views of other interested persons.  She cited three challenges that the SEC faces in adopting rules:

  • How to define the standard. White said she favors a principles-based approach rooted in fiduciary duty applicable to investment advisers.
  • How to provide clear guidance on what the standard would require. This guidance would address how current business practices can or cannot continue under the new standard.
  • How to provide meaningful application, examination and consistent enforcement of a new uniform standard. Central to this challenge, she explained, is extending examination coverage for registered advisers.

The basis of the regulatory initiative is Section 913 of the Dodd-Frank Act Wall Street Reform and Consumer Protection of 2010, which granted the SEC authority to impose a uniform standard of conduct for broker-dealers and investments that provide personalized investment advice.  Section 913 required the SEC to report to Congress on its recommendations, which the SEC submitted in 2011.

Risk monitoring and regulatory standards

Separately, White said that under the authority of Section 965 of the Dodd-Frank Act, the Division of Investment Management established a new risk and examinations office (REO).  She said that REO is developing recommendations for the SEC to “modernize and enhance data reporting for both funds and advisers.”  Among other things, the initiative would:

  • Update the reporting of basic fund census information;
  • Enhance reporting of fund investments in derivatives, liquidity valuation of holdings and securities lending practices; and
  • Collect more information on separately managed accounts.

White said that the Division of Investment Management is also considering whether the SEC should require enhanced risk management programs for mutual funds and exchange traded funds (ETFs), to address risks related to liquidity and use of derivatives, and to enhance the SEC’s oversight of these activities.  In particular, she said that the Division is reviewing options for:

  • Updated liquidity standards;
  • Disclosure of liquidity risks;
  • Measures to limit leverage through use the of derivatives;
  • “Transition plans” to prepare for the winding down investment advisers’ businesses; and
  • Annual requirements for stress testing by investment advisers and funds.

Other issues

White also addressed other issues on the SEC’s agenda, including issuer disclosure and capital formation; trading and markets; economic analysis, risk assessment and data analytics; and enforcement. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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