Implications of the SEC rulemaking agenda

Outsourcing. Custody. Cybersecurity. Data privacy. Private funds. Predictive data analytics. And much more. The SEC’s ambitious and fast-paced rulemaking agenda will have significant consequences — foreseen and unforeseen — for investment advisors, investors, service providers, and the markets more broadly.

In just over 18 months, the SEC has proposed or finalized more than a dozen major rules that will directly impact investment advisors. The SEC’s aggressive pace will likely require investment advisors to implement all of these complex rules in a 28-month period. Each of these rules on its own will result in significant changes to common and longstanding business practices and require substantial implementation efforts by advisors.

In aggregate, they will completely overhaul the current regulatory regime for investment advisors, creating significant disruption with substantial long-term implications. The SEC’s agenda also reflects a counterproductive move away from the principles-based approach of the Investment Advisers Act, which has worked well to evolve with changes in the markets, investment advisors and their clients for the past 80-plus years.

Critically, the SEC has not adequately considered the interrelatedness of many of these rulemakings. This lack of holistic evaluation will lead to inconsistent and duplicative requirements, create unnecessarily complex implementation and compliance challenges, and raise regulatory risk for advisors.  

For example, several of the SEC’s proposals will require advisors to negotiate specific terms with their service providers, including custodians, sub-advisors, cybersecurity providers, portfolio management, pricing, valuation, compliance consultants, and more. Without a cohesive approach by the SEC, advisors could be forced to renegotiate agreements with the same service providers in inconsistent ways several times over the course of a relatively short period. And investment advisors — most of which are small businesses — are not likely to have the leverage to do so. 

Most recently, the SEC has proposed sweeping rules purportedly aimed at advisors’ use of predictive analytics. In reality, this breathtakingly broad proposal would reach virtually every advisor, every technology and every tool advisors employ to communicate with investors. The proposal doesn’t seriously consider operational difficulties or accurately describe the likely costs advisors will bear, particularly for thousands of small businesses. Nor does it acknowledge that these challenges will be layered over the many other new requirements coming down the pike.

Most importantly, this proposal is entirely unnecessary. It is intended to address a concern — management of conflicts of interest — that is already covered by existing regulatory obligations. An advisor’s fiduciary duty already requires that it act in the client’s best interest, including ensuring that conflicts are appropriately managed. And the SEC has, and regularly deploys, tools to enforce these obligations.

As fiduciaries, investment advisors share the SEC’s investor protection mission, and the Investment Adviser Association strongly supports effective regulation to further our shared goals. But the SEC appears to be barreling ahead without evidence that the current regulatory framework for advisors is not working well or that its proposals will be effective to meaningfully protect investors. We call on the SEC to conduct a holistic and cohesive review of the major rule proposals affecting advisers, as well as to create a reasonable and workable implementation timeline.

Karen Barr is president and CEO of the Investment Adviser Association.

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