The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2020 examination priorities on January 7, 2020. OCIE releases this list on an annual basis in order to provide the industry with insights into areas it may focus on thorough the examination process. All the priorities listed on the 2020 list were also on the 2019 list, with some new additions. Which makes us wonder if anything will ever be taken off the list, or if there will just be new additions? Only time will tell.
As many of you know, on June 5, 2019, the SEC passed Regulation Best Interest (Regulation BI) and related rules and interpretations that were intended to enhance investor protection and clarify the difference between broker-dealers (BDs) and registered investment advisers (RIAs). The rule and two final interpretations were over 1,300 pages long, ugh. When I think about reading that many pages of bureaucracy inspired legalese, I think of my former colleague Rich Rudman saying that when it comes to legal writing (actually, I think he applied it to almost everything): Be Bold, Be Brief, Be God. With that in mind, we’re going to summarize the whole thing in one article that is less than 2,000 words. Here we go!
Last week we published an article about the SEC’s most recent cyber examinations and risk alerts. The week before we noted in our curated articles that the SEC is focused on oversight of technology vendors (like us). If you still doubt the SEC’s focus on cybersecurity, it’s time for a reality check.
Ah, welcome to the hot days of summer, which technically doesn’t start until June 20. But that didn’t stop temperatures around the U.S. from topping 95 degrees last week. Whew! And with that warm, beach weather comes the start of vacation season. So in case you forgot to pack that massive stack of reading material that you’ve been collecting since January, below are some articles for your reading pleasure. (Please note that subscriptions may be required for certain articles, sorry.)
In May, we discussed eight things that you needed to know about the liquidity rule in this article. At that time, we noted that part of the rule was due to take effect in December 2018 for large fund families or June 2019 for smaller fund families. The parts that were delayed until 2019 included the liquidity classifications (i.e., the buckets) and the highly liquid minimum requirement. More importantly, our third point was that the SEC would have more changes to the liquidity rule in 2018.
IM Director's Recent Remarks on Standards of Conduct & Liquidity Risk Management
by Peter Michael Allen
1. Its name.
Most people simply refer to the rule as the “liquidity rule”, but its technical name is Rule 22e-4: Investment Company Liquidity Risk Management Programs. If the rule survives in any meaningful form, we should start a contest on whether the industry keeps calling it the liquidity rule or refers to it as Rule 22e-4. Think of Rule 38a-1 under the Investment Company Act. Some people may refer to it as the “compliance rule”, but most simply call it Rule 38a-1.
The SEC has finally proposed a rule that will help clarify the distinction between brokers that refer to themselves as "financial advisors" and investment advisers. (We won't get into why it took so long or how this is a response to the Department of Labor's fiduciary rule, which was recently vacated by federal courts.) Most investors are unaware of the difference and the legal standards that apply to both. In the case of brokers, they are not fiduciaries, which means they do not have to act in the best interest of customers. Investment advisers, however, are fiduciaries and must always act in the best interest of clients. This may seem like a subtle distinction, but it's hugely important for investors that are not well-versed in the working of our securities markets.
For years now, the concept of “Big Data” has been wildly popular in the business world. It seemed that everyone who was anyone was using big data to improve performance, boost revenue, and break into new markets. For true technology innovators, big data was the first step to something bigger: artificial intelligence.
The SEC’s stance on its not-yet-effective liquidity rule appears fluid, as commissioners push to abandon part of the rule and certain division heads move on to other topics. At the 2018 ICI Mutual Funds and Investment Management conference, Commissioner Hester Peirce and division director Dalia Blass signaled the possible end of the liquidity rule as an emphasis of the SEC.
Why is the SEC nervous?
On February 23, 2018, Commissioner Kara M. Stein gave a speech at SEC Speaks in Washington, DC. During the speech, Commissioner Stein raised broad ethical and economic considerations regarding the rapid advances in financial product innovation, which appears to be accelerating as financial firms increasingly use technology to expand their product line and deepen their reach into retail markets.