Hotline Support

Strategic Plan Unveiled, Town Hall Kick-Off, Supreme Court & ALJs, New Elder Report

Fraud in the Workplace: New Data Reveals Top Controls to Detect and Prevent Fraud
June 15, 2018
FINRA Dispute Resolution Updates
July 22, 2018

Just as the SEC was articulating a long-term agenda before Congress and pursuing a first-of-its-kind proactive investor advisory public outreach, the agency was forced to react to a new ruling by the Supreme Court declaring SEC hiring practices for Administrative Law Justices unconstitutional. In this article, we break down these recent developments and highlight a new independent analysis on elder financial exploitation published by the SEC Office of the Investor Advocate.

SEC ISSUES DRAFT STRATEGIC PLAN, CHAIR CLAYTON TESTIFIES

On June 20th, the SEC issued a “Draft Strategic Plan” for FY 2018 through FY 2022. As required by federal statute, the plan sets forth the long-term priorities of the agency. The SEC draft plan is oriented to the protection and education of retail investors. The plan prioritizes improving SEC education and outreach efforts in order to expand investor understanding and access to the capital markets. It also calls for increasing investment opportunities available to retail investors. For firms, it emphasizes enforcement and exam initiatives and the streamlining of disclosure requirements.

The draft plan sets forth various steps the agency would take to keep pace with evolving markets and to improve operations and overall agency effectiveness. Among them, the SEC would expand its use of analytics to address cyber security risk and would enhance the monitoring of clearing, settlement and electronic trading. The draft plan also prioritizes improving the training, development and deployment of human capital. The SEC has invited public comment.

On June 21st, SEC Chair Jay Clayton followed up with testimony before the House Committee on Financial Services. Articulating the core principles in the draft plan, the Chairman prioritized the agency’s commitments to serve Main Street investors; to innovate and respond to market developments and trends; and to leverage staff expertise and data and analytics to improve performance (for more on SEC analytics, see Bates News coverage “Former SEC Enforcement Chief Discusses How Big Data Drives Investigations and Prosecutions”) . He also cited recent successful initiatives that demonstrate these commitments. Among others, he referred to initiating the “Best Interest” rulemaking proceedings to enhance the standards of conduct for broker-dealers and investment advisers (see Bates News report here), clarifying the application of federal securities laws to digital assets, mutual fund disclosure initiatives, and harmonizing rules governing security based swaps.

SEC INVESTOR ADVISORY COMMITTEE HOLDS (OUT-OF-) TOWN HALL ON REGULATION BEST INTEREST AND PROPOSED FORM CRS

On June 13, all five SEC Commissioners attended an “Investing in America” Town Hall in Atlanta, Georgia “to meet with, and hear from, Main Street investors.” In large part, the SEC “message” was the meeting itself, which communicated the new strategic priority and demonstrated the agency’s commitment to travel outside of Washington D.C. to meet with the investing public. The Investor Advisory Committee agenda included discussions of the SEC’s proposed Regulation Best Interest and proposed Form CRS Relationship Summary.

As reported, Chair Clayton emphasized how critical it is for investors to determine whether or not a financial professional is registered, because “the risks you are taking in dealing with them go up dramatically” if they are not. He urged attendees to understand “how each is compensated”…because “when you understand someone’s incentives, you have a much better relationship with them.” Mr. Clayton asserted that the SEC is working to develop databases of investment professionals who have had “bad actions” and to making that information more available and accessible to the public. The other Commissioners raised various investor issues of concern including portfolio diversification and risk associated with ETFs (Commissioner Piwowar) and FinTech and digital information protection (Commissioners Stein and Peirce).

SUPREME COURT THROWS A CURVE

In the midst of the SEC’s strategic planning and public outreach, the Supreme Court issued a ruling affecting the agency’s administrative proceedings. The Supreme Court found that the practice employed by the SEC for hiring Administrative Law Judges (“ALJs”) was unconstitutional. In Lucia v SEC, the Supreme Court determined that ALJs are “Officers of the United States” and must be appointed consistent with the provisions set forth in the constitution, that is “by the President, the head of a department, or a court of law.” The SEC must now determine how to “cure” the constitutionality question and how to proceed with pending and future administrative proceedings. As a result, on June 21st, the SEC issued an Order staying all proceedings before an administrative law judge (“ALJ”) for 30 days, “or [until] further Order of the Commission.”

ONE ADDITIONAL NOTEWORTHY DEVELOPMENT

As part of a series of independent reports published by the Office of the Investor Advocate, SEC Engagement Advisor Stephen Deane authored a white paper on elder financial exploitation. In the paper, Mr. Deane concluded that three interrelated risk factors contribute to the crisis: the health effects of aging, financial and retirement trends and demographic trends. He found that financial impairment is one of the earliest signs of cognitive and physical decline. Compounding these infirmities are the relative wealth of older generations and financial and pension trends that reflect the shift from defined wealth plans to defined contribution plans. He notes: “the shift … has placed responsibility onto the elderly themselves to manage their retirement savings—ironically, just at a time in their lives when their ability to do so may become impaired.” Mr. Deane argues that the dramatic increase in the demographic size of the elderly population threatens “to spur parallel growth in elderly financial exploitation.” The well-resourced paper winds up asking some very challenging ethical questions about the difficulty in developing regulatory remedies to address this growing issue.

CONCLUSION

The SEC’s open draft plan and inclusive public outreach campaign are noteworthy attempts to gain support for an agenda that prioritizes the protection and education of Main Street investors in the face of a technologically evolving market, cyber threats and dwindling regulatory resources. The Supreme Court decision serves notice that the challenges can come from anywhere. The white paper reminds us that the fundamental issues are not going away. Bates will keep tracking these strategic and tactical issues as they arise. For review of the SEC’s 2018 National Exam Program Priorities please see this webinar led by Bates Compliance Solutions Managing Director Bob Lavinge.