Financial Industry and Regulation

Demand For Alt Investments Growing: InvestmentNews reports that financial advisers are increasingly drawn to alternative investment strategies as a means of navigating an economic environment that appears fraught with potential pitfalls. The findings from a new study by CAIS and Mercer show that nearly 90% of advisers surveyed plan to increase allocations to alternatives over the next two years. “We are increasingly seeing advisers target a three-dimensional portfolio that more closely resembles a 50/30/20 model across stocks, bonds and alts,” said Matt Brown, founder and chief executive at CAIS. “These findings would seem to confirm that the great reallocation of capital into alternative strategies is well underway within the private wealth channel,” he said.

SEC Tells Advisors to Put Investors’ Interests First: InvestmentNews reports that Securities and Exchange Commission officials emphasized Tuesday the basics for complying with investment advice regulations and the new marketing rule — put clients’ interests first and don’t mislead them when touting your firm. The SEC’s virtual Investment Adviser/Investment Company National Compliance Seminar featured SEC staff providing direction for the audience of compliance professionals on how to ensure that their firms stay aligned with agency rules, including Regulation Best Interest, the broker-dealer standard of conduct, the fiduciary standard for investment advisers and the advertising rule, which went into force on Nov. 4. SEC Chairman Gary Gensler urged the audience to be “good counsellors” at their firms by helping their colleagues adhere to securities regulations, using the investment advice rules as an example. “At the heart of Reg BI and the IA fiduciary standard is something my mom, Jane Gensler (who, by the way, was a really ‘good counsellor’), would have said: You have to put your client’s interests first,” Gensler said.

Reg BI Remains Top SEC Exam Priority in 2023: ThinkAdvisor reports that Regulation Best Interest and the Advisers Act fiduciary duty “remains a top priority” for Securities and Exchange Commission exams in 2023, Richard Best, head of the Division of Exams, said Tuesday. Speaking at the SEC’s National Compliance Seminar, Best said that standards of conduct — Reg BI and the fiduciary duty — “remains top of mind for us.” The exam division is “focused on how broker-dealers and investment advisors satisfy their obligations under the Reg BI and the Advisers Act fiduciary standard to act in the best interest of retail investors and not to place their own interests ahead of retail investors’ interest,” Best told compliance officers. The exam division 2023 priorities are expected to be issued early next year.

Wrap Programs in SEC Crosshairs as Reg Bi Enforcement Increases: FA Magazine reports that the Securities and Exchange Commission told the industry that it was zeroing in on firms that offer pricey wrap fee programs to clients who don’t actively trade and aren’t receiving annual reviews when it brought enforcements against two registered investment advisors in August and September. Kovack Advisors Inc. and Waddel Reed Associates settled SEC charges in early fall that they violated their fiduciary standards by overcharging clients who sat idle in wrap free programs designed for more frequent traders and did not provide adequate or promised advisor annual reviews and consultations. While the SEC brought both enforcements under the suitability standard, firms with similar violations will be charged with Regulation Best Interest violations going forward, regulators and experts said.

Investment Firms, Trade Groups Push Back on SEC Names Rule: Bloomberg reports that at least 30 asset managers and trade groups have submitted comments to the Securities and Exchange Commission criticizing the proposed "names rule" aimed at preventing funds from misleading investors, which would affect funds labeled as environmental, social and governance focused, as well as funds aimed at value, growth or income. The companies argued that there are no standard measures to define such characteristics and that compliance with the rules would be expensive.

SEC Wants More Information About Inflation Impacts on Firms: Financial Times reports that the Securities and Exchange Commission is using its "filing review process" to compel big companies, such as FedEx Corp. and Costco Wholesale Corp., to expand their disclosures. The SEC is concerned that companies may not be providing investors with enough information on how rising prices could be impacting their profits and liquidity. Companies are required to respond to the SEC requests in writing, and Sarah Lowe, deputy chief accountant in the SEC's office of corporation finance, said last week that companies should provide details such as how inflation has affected operations, sales, capital expenditures, business goals and pricing strategies.

FINRA Revises, Delays Proposed Expungement Rule Change: Advisor Hub reports that the Financial Industry Regulatory Authority has once again revised and delayed a proposed rule change aimed at tightening the process for brokers to expunge customer claims from their records. On November 10, one day before the deadline when the SEC was scheduled to rule on the proposal, FINRA filed to amend it with additional restrictions and extend the timetable for comments and approval by at least one month. The updated proposal would bar brokers from even attempting to erase investors’ complaints if a court or arbitrator previously found them liable in the disputes. FINRA officials also added to the proposal a clause allowing the customers who complained to attend and participate in “all aspects of the prehearing conferences and the expungement hearing.” And it advised arbitrators should not “give any evidentiary weight” if the investors behind the claim opt out of the expungement proceedings.

Both Sides Make Last Minute Push On SEC Climate Rules: Roll Call reports that supporters and opponents of climate-related financial risk disclosure made a last push to influence the Securities and Exchange Commission as the agency works on finalizing its controversial rule, a process that could take months. Companies, industry associations and lawmakers sprinted to make their case in letters to the agency by Nov. 1, the new deadline after the SEC reopened this and several other rule-makings following a technical glitch that caused some comments to go unrecorded. Businesses and organizations that have embraced environmental, social and governance issues told the agency that the rule would provide much-needed transparency and standardization around companies’ material climate risks. Republicans and some interest groups have been arguing that the Supreme Court’s June decision in West Virginia vs. EPA indicates the SEC lacks statutory authority to implement a climate disclosure rule — an argument that SEC Chairman Gary Gensler and other supporters of the proposal have rejected repeatedly. Those headwinds will likely mean that parties on both sides of the climate risk disclosure proposal will have to wait until 2023 to see a final rule from the agency.

SEC Levied Record Fines in Fiscal 2022: Reuters reports that the Securities and Exchange Commission assessed a record $6.4 billion in fines and ill-gotten gains as it picked up the pace of enforcement in fiscal 2022, the agency said in an annual report on Wednesday. The total assessed included a record $4.2 billion in civil penalties, up from a total amount of $3.6 billion in 2021, as it filed 760 total enforcement actions, including 462 new or stand-alone ones. "While we set a Commission record this past fiscal year, we don’t expect to break these records and set new ones each year because we expect behaviors to change," said Gurbir Grewal, director of the division of enforcement.

Policy and Legislation

Spending and Tax Issues Remain During Lame-Duck Congress: Roll Call reports that lawmakers returned to Capitol Hill Monday for a busy "lame duck" agenda, and an open question is how the midterm results — Democrats maintaining Senate control next year, with Republicans having a very narrow House majority — will affect this year's remaining work. Some hope to pass a fiscal 2023 omnibus spending package before the December holidays. Current funding expires Dec. 16, and the top Senate appropriators — Patrick J. Leahy (D-VT) and Richard C. Shelby (R-AL) — are both retiring. But there isn't much time to negotiate and others would prefer to defer to the new Congress next year by passing a continuing resolution. Talks are likely to ramp up on a year-end tax package, with an interest in clearing the decks before the new Congress. One motivation is a bipartisan measure on retirement savings. In addition, Republicans want to extend business tax breaks that otherwise phase down under the 2017 tax law, while Democrats are focused on expanding tax benefits for families. Democrats also hope to raise the debt limit while they still control both chambers.

Tax Breaks for Retirement, Corporate Research on Lame-Duck Agenda: The Wall Street Journal reports that Congress may pass tax breaks for retirement savings and corporate research during the lame duck session, but short deadlines and post-election uncertainty could impede those efforts. Lobbyists and congressional aides expect any potential tax bill to be attached to an omnibus government-spending agreement. That, however, may not materialize if Congress decides to pass a temporary extension and resume spending debates next year. Members from both parties hope to move a retirement-savings bill that passed the House in March. It has drawn wide support in the Senate. The legislation would raise the minimum age when people must start taking distributions from tax-deferred retirement accounts to 75 from 72, increase contribution limits for older workers and encourage smaller employers to create retirement plans and auto-enroll employees. It would also enhance a savings tax credit for lower-income workers. Lawmakers also may consider changes to how businesses treat research expenses for tax purposes, potentially reversing a change they made in the 2017 tax law. If a tax bill does start moving, a number of miscellaneous provisions may get attached. Lawmakers could look to reverse tighter limits on businesses’ interest deductions or extend full write-offs for capital investments.

GOP House Control Next Year Means No Major Spending, Tax Increases: The Wall Street Journal reports that Republicans’ narrow control of the House of Representatives will usher in a return to divided government in Washington next year, likely shattering the chances of any major legislation, stoking divisions within the GOP and putting President Biden on defense as the new Congress investigates his administration. Republican House control will likely stop Democratic plans to raise tax rates on corporations and high-income households. New taxes on unrealized capital gains will be dead in a divided government. A Democratic Senate majority and Biden’s veto will prevent Republicans from repealing tax or spending laws he already signed.