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2020 paradox: An election year with new regulations

'I think it’s going to be a big year for advisor regulations.'

A hint of the road ahead requires only a glance behind.

The Securities and Exchange Commission has proposed a new advertising rule and you can expect more in 2020. “I think it’s going to be a big year for advisor regulations,” said Gail Bernstein, general counsel with the Investment Advisor Association in Washington, DC. “I expect we’re going to see a lot more in 2020,” she added, thinking of final advertising, proxy and accredited investor rules and a proposed custody rule.

Here are more predictions of what lies ahead for you this year.

The “very big lift” for many of his clients will be Regulation Best Interest, said Hardy Callcott, a partner with Sidley in San Francisco. Many will ask the SEC to delay the rule’s June 30 implementation date, but SEC chairman Jay Clayton will decline because he wouldn’t want the new rule intruding upon the fall’s elections, Callcott believes.

Reg BI “is going to be very confusing and not well received” by smaller investors, predicts Peter Chepucavage, an independent regulatory consultant in Washington. “If there is a big [market] correction, I think customers are going to say, ‘You didn’t follow best interest,’” he added.

A vision of volatility

Callcott predicts a recession in 2020 or 2021, while he recognizes many have offered this same prediction annually for years. Chepucavage sees a “significant correction” in 2020. Stephanie Monaco, a partner with Mayer Brown in Washington, expects “significant volatility in the markets and politically” this year.

Before Reg BI takes effect, courts will rule on whether states will be able to proceed with their own fiduciary duty rules, added Monaco.

Of course, completing your first Form CRS will be a reality in 2020. Advisors and broker-dealers will counter the form’s rigid space limitations by handing out a second disclosure form. Advisors will pack more into their Form ADV brochures and broker-dealers will come up with a supplement disclosure document as well to accompany new Form CRS, Callcott asserted.

OCIE will continue to ratchet up its number of exams and the SEC’s Enforcement Division will pursue another initiative similar to its mutual fund amnesty program, predicts Robert Van Grover, a partner with Seward & Kissel in New York. “It gave them some great results,” Van Grover said of the mutual fund share class initiative.

The SEC will investigate firms involved in the troubled repo market, predicts Chepucavage.

Look for progress on the issue of EU RIAs being prevented from registering with the SEC over Europe’s GDPR. “It’s not an issue that can go on indefinitely,” said Van Grover. “It will either be resolved or there will be a practical workaround to get people to where they need to be.”

The SEC’s recent derivatives proposal will draw comments offering alternatives to the agency’s use of VaR, or value at risk criteria, said Bibb Strench, a partner with Thompson Hine in Washington, DC.

Strench also predicts more money will move out of mutual funds into ETFs. Others prognosticate that industry consolidation, pressures on advisory fees and cybersecurity will continue unabated this year. Several told us they expect Clayton to leave the Commission by the end of 2020.

On the Hill

Expect the first part of the year on Capitol Hill to be dominated by what the Senate does regarding president Trump’s impeachment, offers Daniel Crowley, a partner at K&L Gates in Washington, DC. Don’t expect anything after July as the elections loom.

By then, though, the Senate is likely to follow the House and pass a cannabis banking law. “I expect it to be enacted before the election for political reasons,” said Crowley, noting more states legally permit cannabis and banks would like to accept the cash from those sales.

Congress may also pass more restrictions on data collectors and hold hearings on the SEC’s proxy voting plans and ESG investing, added Crowley. “I don’t expect a lot more than that” given that it will be a hotly contested political year, he concluded.

Privacy will float to the top in 2020 what with California’s law coming into play.

“We fully expect to see more state action” on privacy, says the IAA’s Bernstein. The IAA will be lobbying Congress for a uniformed national approach to privacy, so advisors won’t have to deal with a patchwork of state laws, she added.

This article first appeared in sister publication Regulatory Compliance Watch