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2019 followed in the footsteps of previous years with numerous regulatory updates and rulings from the Securities and Exchange Commission (SEC), many of which revolved around modernization and increased transparency. From a long-awaited proposal to amend the outdated rules addressing investment adviser advertisements, to the four-in-one release of rules and interpretations covering standards of conduct, such as with fiduciary duty and the Form CRS Relationship Summary, the SEC’s priorities remain geared towards bringing the agency in line with the 21st century’s ever-evolving financial services industry. The SEC’s regulatory calendar for 2020 appears to continue this trend, most notably with proposed reviews of the Accredited Investor definition and the Custody Rule. If the proposal advancement rate outlined in Chairman Clayton’s 2019 lecture at the University of Pennsylvania holds true for 2020, then the probability of new amendments is increasingly high.The proposed reviews of the Accredited Investor definition and the Custody Rule were officially added to the SEC’s regulatory flex agenda in the fall of 2019, which typically equates to an approximate 12-month timeline for official consideration. Per the SEC’s Agenda Stage of Rulemaking, the above proposals have also been preliminarily scheduled for review in September and April 2020, respectively. In combination with the content of Chairman Clayton’s lecture, which indicates a proposal review advancement rate of 85%, the likelihood of changes or updates is higher than it has been in years.In regards to the Custody Rule, an official revisit of the Rule by the SEC, which was last amended in 2009, has long been one of the most sought after action items by the Investment Adviser Association (IAA) and registered investment advisers across the country. Mired by substantial confusion and increasing industry complexities, compliance with the Rule continues to be a flashpoint of contention and has been specifically identified as one of the most frequent compliance topics identified between the SEC’s Office of Compliance Inspections and Examinations and registered investment advisers. The IAA has further identified via its annual report of the industry that over 45% of advisers reported having custody of client cash, bank accounts, and/or securities. This percentage has continued to increase year over year as adviser service offerings adapt to current industry trends, and adviser consolidation via mergers or acquisitions of assets under custody becomes more frequent. It appears that any proposed changes to the Rule will likely be to amend or clarify the types of adviser authorities and/or arrangements that constitute Custody under the SEC’s current interpretation, such as with inadvertent or implied custody, rather than in changing the accountant’s obligation or procedures in conducting a surprise custody examination. According to the IAA, an estimated 24.5% of advisers who have custody of client assets are required to receive a surprise examination.The proposal to review, and possibly expand, the Accredited Investor definition under Regulation D of the Securities Act of 1933 has also long been pursued by industry groups ranging from investment managers to advisers and institutions. While controversy on allowing retail investors to invest in unregistered financial products is present, with the illiquidity and market risks therein, most in the industry view the possible development as advantageous to investors and their advisers, providing proper oversight is present. One of the most prevalent advantages for advisers specifically would be the increase in the pool of available investment products and strategies that could be marketed to retail clients. According to the IAA’s 2019 report, approximately 82% of registered adviser clients are non-high net worth individuals, and as such, this would significantly increase the availabilities of portfolio offerings for those clients who do not meet the current definition. Along with other relatively new advents in industry services, such as technology-assisted portfolio services, expansion of the definition could offer a meaningful avenue of growth in the industry. While specifics may not be made available until later this year, Chairman Clayton indicated on December 18, 2019, that a possible amendment to allow individuals with certain professional designations, such as the Series 7, 65, and 82, to qualify as accredited investors, is a possibility.
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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
