Monday, March 19, 2018

Commissioner Peirce discusses investment adviser issues at IAA’s compliance conference

By Amanda Maine, J.D.

SEC Commissioner Hester Peirce addressed a number of issues facing the Commission in a conversation with Karen L. Barr, president and CEO of the Investment Adviser Association. She made her remarks at the IAA’s annual compliance conference in Washington, D.C. Barr asked Peirce about what kind of changes she has noticed at the SEC since her previous time there, when she served as counsel to Commissioner Paul Atkins from 2004 to 2008 and as a staff attorney in the Division of Investment Management. Peirce said that there is more enthusiasm, which she attributed to Chairman Jay Clayton. Peirce praised Clayton as someone who has not been part of the "SEC world" and for bringing a fresh perspective to the Commission.

Fiduciaries. Peirce was asked about the Department of Labor’s fiduciary rule, which was adopted last year with much controversy (and vacated by the Fifth Circuit yesterday after Peirce’s conversation with Barr). Peirce said that it is time for a new rule for fiduciaries, but described the DOL’s rule as "destructive." According to Peirce, the DOL’s fiduciary rule has resulted in investor confusion relating to the nature of the relationship between the investor and their advisor, particularly regarding the titles that financial professionals give themselves. Peirce said she would be open to pursuing Commission guidance regarding these titles for broker-dealers and what title they chose to call themselves.

She was also critical of the processes undertaken by the DOL in adopting the rule, stating that there was a lack of coordination and consultation with the SEC and other stakeholders such as state regulators and insurance regulators. However, she remains enthusiastic that a rule can be adopted with greater coordination. Peirce noted that some people tend to throw around the term "fiduciary" a lot. She is open to guidance that would explain who actually qualifies as a fiduciary and stressed the importance of receiving input from investors.

Cybersecurity and technology. Barr asked about some of the top challenges that the SEC faces. Peirce replied that cybersecurity has been a top priority for the Commission and that it is one of Chairman Clayton’s main concerns. The cybersecurity issue is important not just for registrants, but also for the SEC itself, Peirce said, alluding to the EDGAR breach that the Commission acknowledged last year. "If we can’t promise to protect data, we shouldn’t be collecting it," Peirce proclaimed.

Peirce also reaffirmed Clayton’s focus on issues implicating ICOs and blockchain technology. The SEC will continue to combat fraud in this area, but Peirce assured that the Commission is open to technology that will encourage innovation.

Retrospective review. Barr asked Peirce about the possibility of the SEC conducting a retrospective review of its regulations. Peirce said that one approach would be to issue a concept release to gather ideas on what needs to change, such as examining regulations that effect advertising. She would also like to revisit the accredited investor standard, admitting that she is not a fan of it. She believes in "economic liberty," which should include investors that may not have enough money meet the Commission’s accredited investor threshold but are still sophisticated.

FINRA and IAs. Peirce said she is not in favor of giving FINRA any more authority over investment advisers. FINRA is a rules-based organization, while investment advisers are principles-based, she explained. If you put investment advisers in a rules-based SRO, you would see a real change in the industry that would not be good for investors, according to Peirce. She did note that FINRA has backed off on trying to be an investment adviser SRO. She praised FINRA president Robert Cook and his 360 Review initiative to review FINRA’s own organizational issues.

Compliance officers. Barr also inquired about the treatment of compliance professionals in enforcement and examinations. Peirce said that the SEC, while it does have an enforcement program, it is a regulatory agency and not a law enforcement agency. In its primary role as a regulator, Peirce wants advisers to be able to come to the Commission with problems they encounter so they can get guidance from the SEC on how to comply with the rules. "I don’t want to have an atmosphere of fear" where advisers might feel they will be judged just for asking a question, she explained. With enforcement, she doesn’t want to "put targets on compliance officers’ backs" that would result in a climate where people don’t want to serve as compliance officers.

Guidance. An audience member asked why some Commission interpretive guidance does not sync up with what advisers have experienced. Peirce responded that lawyers designing the guidance think a lot about how it will be reviewed in the courts, and is an area she has concerns in because guidance can be used as a rulemaking that no one provided input on except the person who requested the guidance in the first place. "I’m worried that we are doing rulemaking by guidance," she said. However, she said she does believe that guidance is helpful, and encouraged advisers to contact the staff with issues they have with the Commission’s guidance.