Bates Research - 08-10-17

Financial Regulatory Roundup: New Players Set to Advance New Agenda

At the SEC, CFTC and FINRA, key personnel changes are finally taking place, and with them some repositioning around new agendas. Today we bring you an update on recent developments and appointments to watch.

SEC Chair Clayton—More Advisor Exams

As we reported in early July, outcomes for several of new SEC Chair Jay Clayton’s priorities rest on the assumption that the agency “can squeeze more efficiencies out of enforcement and examinations with fewer staff.” Since that report, the House Appropriations Committee approved the fiscal year 2018 financial services funding bill totaling $20.231 billion, incorporating the anticipated reductions in SEC funding.

When it comes to SEC Advisor Exams, the SEC will have its hands full meeting Mr. Clayton’s ambition. According to Pete Driscoll, acting Director of the Office of Compliance Inspections and Examinations (OCIE), the number of exams could go up 30% this year, and “the share of all SEC-registered advisors examined may surge to 15 percent from last year’s 11 percent.” Mr. Driscoll “attributed much of the increase to the shift of some OCIE broker-dealer examiners into investment advisor duty.”

Another expected driver of the increase in the number of exams, however, appears to have been taken off the table. The “third-party advisor audit proposal” initiated by former SEC Chair Mary Jo White was dropped from the SEC regulatory agenda. Media have since characterized the proposal as dead. They suggested that a third-party audit rule would have been in trouble anyway, not only because of potential industry opposition, but also because the head of the SEC Division tasked with creating the rule is stepping down (see below).

New Leadership at the SEC

The departure of key personnel, a feature of any change in administration, has an impact on the policies and goals of an agency which finds itself under new management. Over the past few weeks, a number of important personnel announcements have come out of the SEC (and other agencies) reflecting the change in leadership and direction.

David W. Grim, the aforementioned Director of the Division of Investment Management, will be leaving the commission in September. Mr. Grim oversaw the $70 trillion asset management industry, including mutual funds; exchange-traded funds; closed-end funds; variable insurance products; business development companies and investment advisers. In a statement highlighting his accomplishments over a twenty-year tenure, the SEC noted that Mr. Grim “left a legacy of regulatory policy reforms and legal guidance that have shaped the Division and the industry it regulates.” Who will replace Mr. Grim, and how it will affect the Division, remains uncertain at this time.

Hester Peirce was nominated by President Trump to serve as SEC Commissioner. Media reports state that Ms. Peirce is “likely to fit in well with SEC Chairman Jay Clayton’s deregulatory agenda,” particularly as it relates to the Department of Labor’s Fiduciary Rule and the ability to raise funds under the Jumpstart our Business Startups Act. (See Bates blog on Mr. Clayton’s agenda). If confirmed, Ms. Peirce would fill one of two open seats on the Commission. Ms. Peirce is a former Senate Banking Committee staff member and is a Senior Research Fellow and Director of the Financial Markets Working Group at the Mercatus Center at George Mason University since 2012. From 2000 to 2008, Ms. Peirce served at the Securities and Exchange Commission as a Staff Attorney in the Division of Investment Management and as Counsel to Commissioner Paul Atkins. President Obama had nominated her to be Commissioner in 2016, but the Senate never acted on it.

Christopher R. Hetner was appointed Senior Advisor for Cybersecurity Policy. He played a similar role under Chair Mary Jo White and Acting Chair Michael Piwowar. An SEC press release stated that Mr. Hetner will “coordinate efforts across the agency to address cybersecurity policy, engage with external stakeholders, and help enhance the SEC’s mechanisms for assessing cyber-related market risk.”

His new tenure was greeted postively. The OCIE just concluded an examination of 75 broker-dealers, investment advisers and investment companies to assess industry practices concerning cybersecurity preparedness. The report showed an overall improvement in awareness of cyber-related risks and the implementation of a number of cybersecurity practices since the OCIE's previous report. Though the OCIE found that firms were not uniform in "adhering to or enforcing" policies and procedures, and that for many firms, guidance for employees was too general, the overall trends suggest greater efforts were being undertaken. The OCIE report included recommendations for improving policies, procedures and practices.

FINRA Enforcement

FINRA announced plans to consolidate its enforcement teams into a single unit. The new structure will bring together the team that handles disciplinary actions related to trading-based matters with the team that handles cases referred from other regulatory oversight divisions. The consolidation comes as part of FINRA360, “the organization’s ongoing comprehensive self-evaluation and improvement initiative.”

Susan Schroeder has been promoted to Executive Vice President and Head of Enforcement for FINRA. Ms. Schroeder served previously as FINRA Senior Vice President and Deputy Chief of Enforcement, and has been serving as acting Head of Enforcement since the departure of her predecessor in January.

At the CFTC

The U.S. Senate unanimously confirmed J. Christopher Giancarlo as CFTC Chair (see Bates blog on the new Chairman's policy agenda) and Rostin Behnam and Brian Quintenz as CFTC Commissioners. Mr. Behnam was senior counsel to U.S. Senator Debbie Stabenow (D-Michigan). Mr. Quintenz was previously Chief Investment Officer of Saeculum Capital Management LLC and had worked as a legislative aide and senior policy advisor to former Representative Deborah Pryce, (R-Ohio). Mr. Quintenz had been nominated by President Obama in 2016.

A third Republican nominee, Dawn DeBerry Stump, was approved by the Senate Agriculture Committee but has not yet received a full Senate vote. Ms. Stump is a former Executive Director of the Americas Advisory Board for the Futures Industry Association and a vice president at NYSE Euronext.

The Commission is split evenly between Republicans Giancarlo and Quintenz and Democrats Behnam and Sharon Y. Bowen. Ms. Bowen announced that she will be stepping down in the coming months.

Regulatory Fines

This far into the new administration, the slow pace of change is having an effect. On the enforcement front, the Wall Street Journal reports that “penalties levied against firms and individuals by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority in the first half of 2017 were down nearly two-thirds compared with the first half of 2016—putting regulators on track for the lowest annual level of fines since at least 2010.” The report suggests that this represents in part “a shift to a business friendly stance at the regulatory agencies,” but the paper also cites as a factor the delays and slow pace of the transition.

Perhaps, with the addition of new leadership, that pace may start to pick up. Bates will keep you apprised of changes to both the policies and the players.


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