How Trump's financial cop on the block should prioritize the job
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The newly appointed chairman of the U.S. Securities and Exchange Commission (SEC), Jay Clayton, has a lot on his plate. As the new financial cop on the block, he is picking up where his predecessor, Mary Jo White, left off. From the record number of enforcement actions during her tenure, to the rules written under her aegis, White was laser-focused on modernizing and improving the asset management industry.

But the markets are asking questions. What can we expect from Clayton? How will he manage all the proposals and policies vying for his attention? And equally important, what happens if the agency doesn’t secure the requisite appropriations, and finds itself unable to invest in the right people and technology to protect U.S. investors?

As a long-time proponent of investor interests, I’ve been paying close attention to both the needs of investors and the professionals who help make their financial objectives a reality. As such, I recommend that Clayton prioritize the following six policy areas given their likely effectiveness in protecting and serving the needs of investors. 

Fiduciary obligations of professionals

To preserve trust in our industry, it’s critical to have an unshakeable fiduciary standard for professionals who provide personalized investment advice to retail investors. While drafting a uniform standard for providing investment advice is no simple undertaking, the most intelligent approach would be to regulate the actual titles used by investment professionals. For example, anyone who describes their title or job as an “adviser” must be bound by the fiduciary obligations enshrined in the Investment Advisers Act.

But it can’t stop there. Commissioned brokers who provide investment ideas or execute trades should also be required to refer to their roles as “salespersons.” The industry needs far more transparency so investors understand that the role of brokers includes selling investment ideas to generate commission-based transactions, as compared to investment advisers, who advise clients on investment strategies and tactics to achieve their financial goals.

Disclosures by investment industry

Two additional areas in need of attention are fees (or costs) and risks. Most investors are befuddled by the array of potentially confusing terms describing the fees and costs associated with investment products. There is everything from “transfer agent fees” to “12b-1 fees,” not to mention the myriad terms in between. Don’t investors deserve to understand what these costs are, how much they are, and how they will affect their investment returns?

The industry also needs more transparency and clarity regarding mutual fund cost disclosures and risks that may affect investor outcomes. For example, there should be more transparency of exchange-traded funds (ETFs) with limited liquidity and of synthetic exchange-traded products with idiosyncratic risks. By enhancing the quality of disclosures across the spectrum of investment products, the SEC can better enable investors and their advisers to make truly informed decisions.

Regulation of financial technology

A recent CFA Institute survey of investment professionals found that many see emerging technologies, such as automated, or “robo,” advisers as providing important investment services to investors who have limited assets to manage. But these benefits were not without serious risks. In particular, there were concerns that the underlying algorithms may produce recommendations directing clients toward products that benefit service providers rather than actual clients.

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They also noted that the untested nature of the technologies in stress scenarios could worsen, rather than aid, the investment outcomes for investors — similar to last year’s flash crash of the British pound. To further complicate matters, survey respondents felt that the oversight and regulation of financial technologies is not on par with the regulatory requirements imposed upon traditional advisers.

 

To prevent unnecessary losses for investors, the SEC should step up its examination and enforcement of existing adviser regulations as they apply to automated advisory firms. The commission should also clarify for these firms that they are subject to the same client-loyalty requirements that apply to traditional advisers.

Enforcement of existing rules

In a CFA Institute survey about SEC priorities, investment professionals identified over-regulation as one of the biggest threats to U.S. financial markets. They further said that enforcing existing rules is more important that adding to the litany of regulations already in place. Finally, they were especially concerned about the ongoing threat of cybersecurity breaches.

In response, one of the most important policy areas for the SEC should be to create new rules that protect investors, such as the aforementioned fiduciary duty rule. Second, the new chairman should continue to enforce the regulations set in place by his predecessor that actually serve the interests of investors. Finally, the SEC must increase its financial and human resources to protect investors and firms alike from cybersecurity risks.

Non-GAAP financial measures

We all remember how investors were misled in the late 1990s and early 2000s by non-GAAP financial measures. There’s no better way to avoid repeating this period in history than to vigorously monitor — and where appropriate, counteract — the expansion of non-GAAP measures. With our industry at an inflection point, increasing the transparency and comparability of non-GAAP reporting for investors has never been more important.

Standardized auditor reports

The fact is audit reports are dense and oftentimes impenetrable for investors. And this is troubling since the actual reports contain such valuable information. I’m heartened that the SEC has taken note of this issue, and I sincerely hope the commission continues its efforts to ensure that auditors’ reports are transparent and protect the interests of the investor community. The recently announced Public Company Accounting Oversight Board (PCAOB) adoption is a welcome change that will go a long way in ensuring robust and investor-friendly auditor reporting within the United States.

From setting the regulatory agenda for the Trump administration, to securing adequate funds, to actually getting the job done, Clayton will be a busy man. But since tide and time wait for no one, finding ways to prioritize his extensive “to do” list and protect investors’ rights will be mission critical. By focusing on these policy areas, the industry and the investors who rely on our expertise will reap the benefits for years to come.

Bjorn Forfang is a managing director at the CFA Institute. He has more than 20 years of experience, including 14 years as a managing director at UBS Investment Bank.


The views expressed by contributors are their own and are not the views of The Hill.