On November 15, 2016, shortly after Donald Trump was elected President, we released our first take on how the election of Trump could impact registered investment adviser (“RIA”) regulation. Nearly two months later, on January 5, 2017, we released a second take following key appointee announcements. Now, nearly a year later, we take a look at what may be still to come in regards to the Department of Labor (“DOL”) fiduciary rule, the Dodd-Frank Act, and efforts to increase the audit frequency of RIA firms registered with the Securities and Exchange Commission (“SEC”). To date, the overall impact of President Trump on RIA regulation has been relatively muted. However, we have observed some impact as it relates to the DOL fiduciary rule and efforts to increase investment adviser regulatory examination frequency.
Future of the DOL Fiduciary Rule
From a public standpoint, President Trump has probably impacted the DOL fiduciary rule more so than any other financial regulation. However, the first phase of the rule still went into effect on June 9, 2017 and does impact all RIA firms. The good news is that while the implementation of the rule has led to a fair amount of confusion, it has not hindered the continued growth of the RIA industry. During this now extended “transition period” which started on June 9, 2017 and now extends to July 1, 2019, RIA firms will generally need to comply with the “Impartial Conduct Standards,” operate as a level fee advisor when appropriate, and establish additional documentation and policies and procedures.
Presently, there are a number of possible future scenarios for the fiduciary rule which include:
- The rule is fully implemented as previously passed once the extended transition period concludes on July 1, 2019
- The rule is implemented but current “streamlined” requirements applicable during the extended transition period ultimately become the final and full requirements
- The rule, as established by the DOL, is altered or abolished and instead there is a “uniform” fiduciary rule enacted by the SEC
- After an extensive review by the DOL, the rule is fully abolished and no longer applicable
- The rule is overturned by Congress with the passage of a new law
- The rule is defeated in federal court as the new DOL administration chooses not to actively defend it
The long term future of the rule remains uncertain, but most industry observers suspect that at least the current requirements applicable during this “transition period” will stick for the long term. However, even if the rule was to ultimately be overturned in the coming months or years, there is now more public awareness than ever in regards to investors seeking “fiduciary” advice which continues to greatly benefit the RIA business model.
SEC RIA Examination Frequency under new Chairman Jay Clayton
The early signs from new SEC Chairman Jay Clayton generally point to business as usual as it relates to RIA regulation and examinations. Investment adviser examination frequency and volume is increasing under Chairman Clayton as the agency continues to try to improve the efficiency of its investment adviser examination program. In particular, better use of data, a movement towards more limited scope exams, and a reallocation of examination staff allowed the SEC to increase its audit frequency rate for 2017.
Thus far, it seems the SEC may be a bit less likely to introduce new rules under Clayton’s leadership and that the current status quo of the investment adviser examination program is likely to continue. However, new Form ADV requirements which had been previously adopted under the previous Chairwoman, continued to proceed as expected and are now in full effect. These changes are manageable but do require every RIA firm to provide additional information on their Form ADV. Industry observers also still expect that a rule requiring investment advisory firms to establish an anti-money laundering (“AML”) program which was previously introduced in August 2015 is to be finalized in the coming months.
Potential Repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act
Throughout the campaign, President-elect Trump expressed his desire to repeal the Dodd-Frank Act. It seems now more than ever that a full repeal of the Dodd-Frank Act is unlikely. However, with tax reform now checked off, it’s possible a partial repeal of Dodd-Frank could emerge as a near-term priority. The most relevant components of the Dodd-Frank Act which impact the investment adviser industry are: 1) a requirement that advisers to private funds such as hedge funds and private equity funds register as investment advisers or exempt reporting advisers and 2) that “mid-sized advisers” with regulatory assets under management (“AUM”) between $25 to $100 million transition from federal to state registration. A full repeal of the act could mean that some RIA firms would need to transition back to federal registration, however, the National Securities Markets Improvement Act of 1996 (“NSMIA”) still grants the SEC authority to set the AUM registration threshold for federal registration of RIA firms as it sees fit.
Be sure to continue to check back as we provide additional commentary on the future regulatory outlook for RIA firms in 2018 and beyond.
RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.