Each week, we are giving you our weekly report highlighting the top compliance news articles from various industry news publications. We have selected the most relevant and important news articles related to registered investment adviser (“RIA”) compliance and regulatory issues. This week’s recap focuses on The Department of Labor (“DOL”) fiduciary rule, breakaway advisors contributing to RIA industry growth, and potential robo-advisor scrutiny from Securities and Exchange Commission (“SEC”) regulators.
Here are our top investment adviser compliance articles for the week of March 11th, 2022:
1. Pressure Mounts on DOL for Fiduciary Rule Updates (Author – Patrick Donachie, WealthManagement.com)
A coalition of organizations is urging the DOL to update its fiduciary rule and follow through on expected changes to last year’s fiduciary exemption. This article overviews arguments for needed changes to protect retirement investors. The rule currently “allows for conflicted investment advice that puts the retirement savings of millions of Americans at risk and is inconsistent with the letter and spirit of Employee Retirement Income Security Act of 1974 (“ERISA”), the statute whose purpose is to promote the retirement security of workers and retirees,” Micah Hauptman, Chartered Financial Analyst’s (“CFA”) Director of Investor Protection, said about the contents of the letter. Circuit Court of Appeals vacated the Obama administration’s original fiduciary rule for retirement advice, with the Trump administration releasing its own proposal in summer 2020. That new rule included exemptions to fiduciary conduct as long as providers adhered to “impartial conduct standards” modeled after the SEC’s Regulation Best Interest.
2. Advisers Flock to RIAs in the New Normal (Author – Bruce Kelly, Investment News)
2021 saw an increase in net gain of 1,530 financial advisors entering the RIA industry, 69.4% more than in 2016, when RIAs had a net gain of 903 advisors. For these breakaway advisors, they aim to earn a greater share of their revenue, access to public markets, and enjoy greater autonomy than they would receive working at a big bank. The RIA industry is additionally attractive due to the private equity money flooding the industry. The new normal for advisor growth in RIA channels is proving to not slow down with listings and deals for acquisitions with aggressive growth targets for assets and earnings occurring. Read the article further to see additional statistics around the growth of the RIA industry and rise in breakaway advisors.
3. Get Ready for New DOL Rollover Rules on July 1 (Author –Melanie Waddell, Think Advisor)
In this article, Melanie Waddell overviews what advisors need to know regarding new DOL rollover rules through email statements made to ThinkAdvisor from Fresh Reish, ERISA attorney, and partner at Faegre Drinker. Starting July 1, under the Labor Department’s new fiduciary prohibited transaction exemption RIAs “will need to provide to the participant, in writing, the specific reasons why a rollover is in `their` best interest,” according to Reish. “As a result, the analysis and recommendation needs to be personalized, or individualized, to the participant and his or her circumstances,”. Additionally, Reish explained that attorneys and regulators, “will undoubtedly look at the written reasons after the fact and see if they reflected the needs and circumstances of that participant.”
4. SEC’s Gensler Takes Aim at Robo-Adviser Investing Strategies (Author – Sean Allocca, Investment News)
Sean Allocca reports on possible robo-advisor conflicts gaining increased scrutiny from regulators. Last week, SEC Chief Gary Gensler said areas of conflicts raising important public policy questions stem from new tools like Artificial intelligence (“AI”) and predictive analytics utilized by robo-advisors suggesting personalized financial plans or by recommending new products. The effects of behavioral prompts on investing outcomes are among questions being raised. The main goal for regulators is finding out what these tools are designed to achieve, Gensler stating “Are they solely optimizing for the investor’s benefits, including risk appetite and returns? Or are they also optimizing for other factors, including the revenues and performance of the platforms?” The algorithms are a big area of concern, as seen through deficiency letters citing shortcomings of portfolio management and disclosing conflicts of interest. The article continues with examples and insight of potential compliance issues and what regulatory actions could be enforced.
5. Broad Consumer Coalition Urges DOL To Speed Up Fiduciary Rule Update (Author – Tracey Longo, Financial Advisor)
Tracey Longo states, “A coalition of 40 consumer and investor advocate groups asked the U.S. Department of Labor to hasten the agency’s promised updates of its fiduciary rule to protect investors from costly conflicts of interest.” The Save Our Retirement coalition sent a letter to the Acting Assistant Secretary for the DOL’s Employee Benefits Security Administration, Ali Khawar, imploring them to ‘update and eliminate…loopholes in the current definition of fiduciary investment advice.’ Last year Biden Administration “acknowledged the need to update the DOL’s definition of who is considered a fiduciary when providing retirement advice,” but a proposed rule from the DOL has not been sent to the White House for review. In addition, the coalition asked Assistant Secretary Ali Khawar “for a revision that would require firms and investment professionals to provide ongoing monitoring services of customers’ investments.” Stay tuned.
Don’t forget to check out last week’s top RIA compliance news articles that focus on the Securities and Exchange Commission’s (“SEC”) cybersecurity regulations, top RIA compliance issues, and SEC regulation of the New Marketing Rule implementation date coming November 2022.