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Spring Regulatory Update: 4 key developments for advisors to track

Submitted by kim.sanders on May 25, 2018
Spring Regulatory Update

Spring Regulatory Update: 4 key developments for advisors to track

Understand four evolving regulatory moves that could affect your firm in the coming months.

Rapid change is the new normal in this year’s regulatory environment, which could put financial advisors on uncertain footing. Schwab’s legal experts and our Office of Legislative and Regulatory Affairs in Washington, D.C., are working to untangle the complexity so that you can plan ahead and keep bringing exceptional service to your clients.

We recently talked to Steve Johnson, Schwab vice president and associate general counsel, about four key developments that advisors should stay on top of in the months ahead, plus resources from Schwab to help you navigate the regulatory terrain:

1. SEC proposes new best-interest standard; DOL Fiduciary Rule vacated

The past few months have brought a number of updates when it comes to standards of care for broker-dealers and registered financial advisors, says Johnson, who serves as chief counsel to Schwab Advisor Services.

On April 18, 2018, the Securities and Exchange Commission (SEC) proposed new rules further defining obligations for broker-dealers and registered investment advisors when they make investment advice recommendations on both retirement and taxable accounts. Schwab is still studying the lengthy set of proposals and plans on filing a comment letter and meeting with the SEC to discuss any concerns, including any potential negative impacts on independent RIAs. What exactly will happen after the 90-day comment period is unclear.

What is clearer, however, is the status of the Department of Labor’s (DOL) Fiduciary Rule. The U.S. Court of Appeals for the 5th Circuit has overturned the Department of Labor’s Fiduciary Rule and related exemptions including the Best Interest Contract (BIC) Exemption. The court’s mandate finalizing this order is expected any day now. The DOL also issued a Temporary Enforcement Policy on Prohibited Transaction Rules Applicable to Investment Advice Fiduciaries. In this temporary relief, the DOL indicates that from June 9, 2017 (when the rule first went into effect) until the DOL issues any future guidance, firms may continue to rely on the Impartial Conduct Standards (under the BIC) to meet their ERISA obligations when providing non-discretionary investment advice. An example of this, says Johnson, could be when recommending that a client rollover from a 401 (k) plan to an account that an advisor can directly manage for a fee.

2. Top SEC exam priorities: cybersecurity, protecting senior investors

Overall, the odds of your firm being examined are on the rise. The U.S. Securities and Exchange Commission (SEC) conducted 2,100 exams of advisors last year, a 46% increase over 2016. The commission aims to examine 18% of all advisors this year, compared with 15% in 20171.

One of the SEC’s top exam priorities in 2018, Johnson says, is the protection of retail investors, particularly seniors and those saving for retirement. Advisors should expect scrutiny in the following areas:

  • Disclosure of the cost of investing—the fees that a client pays and the compensation that a financial professional receives, and how such costs are calculated
  • Mutual fund share classes—including advisor incentives to recommend a particular share class and whether that conflict was disclosed to investors
  • Wrap fee programs—specifically the best execution for clients and whether any trade-away costs are properly disclosed
  • Retirement products—the appropriateness of variable insurance products, target date funds, and retirement vehicles that serve employees of state and local governments and nonprofits

Cybersecurity is another high priority, says Johnson. The SEC plans to conduct a cybersecurity sweep exam focusing on advisors who maintain remote offices and on firms that have merged. This means that advisors can expect the SEC to look at what kind of cybersecurity program their firm put in place following a merger. “They're also going to look into the use of personal email or other unregulated forms of communication,” Johnson says.

Phishing attacks against financial services firms continue to skyrocket. Johnson recommends that firms continuously train employees on how to recognize cybersecurity threats. “It starts with a very simple rule: If you’re not sure what a particular link or attachment is, don’t click on it,” he says. Firms should also routinely check all email accounts for unauthorized auto-forwarding rules and never allow employees to use their work email for personal messages.

“Another good practice is to call your clients and verify all the details of a disbursement, so you can tell if somebody might have set up an unauthorized wire transfer,” Johnson says. “Even though it may be time-consuming, a call can save you and the client a lot of financial heartache.”

Visit our Cybersecurity Resource Center to protect your firm from phishing and other risks. Also, check out our Compliance Review white paper: .

3. Bringing clarity to SEC Custody Rule

Another source of uncertainty for many advisors is how the SEC’s Custody Rule guidance defines first-party versus third-party money movement. Johnson says that Schwab has worked closely with the Investment Adviser Association and other industry leaders to suggest some standard guidelines. For example, we agreed that when both the destination and sending accounts have the same taxpayer identification number, the transaction is a first-party money movement. If the accounts have different numbers, then the transaction can be considered a third-party money movement.

For advisors who opt to retain custody, Johnson has several pieces of advice to help firms prepare for a potential SEC exam:

  • Identify a person to be your firm’s point of contact for any SEC exam and prepare the necessary documentation ahead of time.
  • Maintain documentation that shows your compliance with the set out by the SEC in their no-action letter dated February 21, 2017.
  • Document the removal of money movement authority.
  • Update your Form ADV to include third-party standing letters of authorization and spell out the firm’s current money movement practices.

“The more preparation you do, the better result you’ll have when the SEC shows up,” says Johnson.

Interested in learning more about the Custody Rule, the potential impact to your firm and how Schwab can help? Access information, tools and resources on the dedicated in our Service Guide.

4. Stricter privacy safeguards in EU

A new set of data-protection and privacy laws will take effect May 25, 2018 in the European Union (EU), raising important obligations for advisors who serve clients in any of the 28 EU member nations.

The General Data Protection Regulation (GDPR) broadens the definition of personal data to include any information that allows a company to identify an individual. In addition to meeting stringent data-protection standards, advisors with EU-based clients will need to create a GDPR-compliant privacy notice and designate a representative in the EU. Firms should also revise existing vendor agreements to reflect the GDPR and update their policies to address the latest EU privacy and data-protection rights.

Intelligence to help you stay ahead of the curve

As these and other regulatory issues continue to unfold, keep reaching out to your compliance resources and legal counsel for guidance. Schwab Advisor Services™ also provides access to current news, analysis, and a library of resources on our Legislative & Regulatory Affairs page and look for RIA Washington Watch, our quarterly digest of relevant news from the Hill.

This report is current as of May 15, 2018. We hope these tips help you guide your firm and clients through an ever-changing regulatory season.

If you're thinking about becoming an independent advisor, consider a custodian that invests in your success. Contact us to learn more about the benefits of a custodial relationship with Schwab.