Much has been written in the past week around how the election of Donald Trump may impact key registered investment adviser (“RIA”) regulatory issues including the Department of Labor (“DOL”) fiduciary rule, the Dodd-Frank Act, and efforts to increase the examination frequency of RIA firms registered with the Securities and Exchange Commission (“SEC”). As of now, a number of diverging views have emerged further making it clear that “uncertainty” is perhaps the only thing we can be certain of at this moment. This is our first take based on where things stand today and we will continue to provide updates as more clarity emerges in the coming months..
DOL Fiduciary Rule
As of now, we are recommending that all RIA firms continue to prepare for the DOL fiduciary rule to be implemented as scheduled on April 10, 2017. As of now, Donald Trump has yet to personally comment on his stance on this rule. Thus, it’s unclear at this point if President-elect Trump will make repealing the rule a focus. While much has been assumed, it’s also not entirely clear at this point that he is even opposed to the rule. Notably, there is no mention of the DOL fiduciary rule on the official transition website. There are also rumblings that some larger broker-dealer firms may now privately support some components of the rule.
Yesterday, the Wall Street Journal reported that Representative Ann Wagner (Republican, Missouri) will renew her efforts to repeal the rule. Previously, a bill led by Rep. Wagner designed to repeal the rule was vetoed by President Obama. As of now, House Speaker Paul Ryan (Republican, Wisconsin) has not stated whether a repeal or delay of the rule will be a short term priority. However, even if Congress does not take action, it is possible that a newly appointed head of the DOL could also employ a number of tactics to delay the rule’s implementation. In particular, DOL fiduciary rule expert Ron Rhoades writes that, “the reality is that it is very, very easy for an agency to delay the implementation of a rule, and then to eventually kill it by eventual adoption of a new rule.”
Dodd-Frank Wall Street Reform and Consumer Protection Act
Throughout the campaign, President-elect Trump did express his support to repeal the Dodd-Frank Act. This policy position is reinforced on the official transition website which states that the, “Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act,” and replace it with other policies.
A full or partial repeal of the Dodd-Frank Act would have limited impact on the vast majority of RIA firms. 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.
In addition, there are a series of other small rule changes incorporated as part of Dodd-Frank including required Form ADV information, an enhanced “pay to play” rule, and specification on how regulatory AUM is calculated. However, at this point, RIA firms should take a wait and see approach to see if this continues to be a legislative priority in the coming months and if appealed, whether it is a partial or full repeal.
Efforts to Increase SEC RIA Audit Frequency
Yesterday, current SEC chairwoman Mary Jo White announced that she will step down in January 2017. As of late, under Ms. White’s leadership, the agency has expressed more focus on increasing the frequency of RIA examinations. Most recently, a potential rule that would require investment advisers to be audited by third-party firms appeared to be gaining traction. As of now, that proposal appears to be tabled. However, it is interesting to note that third-party audits were an approach previously trumpeted by former Republican SEC Commissioner Dan Gallagher. Thus, it is possible that a third party audit approach could receive renewed interest under new SEC Republican leadership.
Representative Maxine Waters (Democrat, California) has previously introduced a bill in 2014 that would impose user fees on SEC-registered RIA firms to help fund additional audits. This bill has previously been rejected by Republicans and also appears unlikely to receive further traction in the near term. Former Representative Spencer Bachus (Republican, Alabama) previously introduced a bill in 2012 that would have allowed for a self-regulatory organization (“SRO”) to oversee RIA regulation. Presently, it’s unclear if a similar bill could be reintroduced in the future.
It’s also important to note that SEC staff members are not political appointees. Thus, unlike many under federal agencies, the day to day agenda of the SEC may be less impacted and thus a number of previously proposed and announced rule changes such as new Form ADV requirements appear likely to proceed as expected.