SEC Chairman Gary Gensler
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With government and industry officials taking a new look at investment markets amid collapsing prices for stocks, bonds, cryptocurrencies and nearly everything else, 2022 was bound to be a big year for regulation.

And the regulators whose responsibilities include looking over the shoulders of advisors and broker-dealers didn't fail to deliver. Their proposals would do everything from easing the way for remote work and allowing bitcoin and other "alternative" investments in 401(k) plans to making advisors responsible for the fiduciary compliance of their subcontractors.

Here were some of the biggest ones:

FINRA's home-work assignment

Indian student wear headphones use laptop e-learning remotely by videocall
Pushback continues against the Financial Industry Regulatory Authority's plans to accommodate remote-work arrangements made common during the COVID-19 pandemic.

One proposal from FINRA, the brokerage industry's self-regulator, would allow brokers' residential offices to be classified as "non-branch" locations that would be subject to inspection once every three years. The current standard calls for annual inspections.

If the Securities and Exchange Commission approves the proposed change, brokers would still be under tight restrictions governing what they can do at their home offices. They, for instance, would be prohibited from using their residences to store records or documents required by FINRA or federal agencies. They would also be barred from meeting with customers at their home office and from using anything but their parent firm's computer system for electronic communications. The SEC stopped taking comments on the proposal on Dec. 9 and could issue a final decision any day.

Read more: FINRA's hot-button proposal on remote work gains time

Remote inspections

Indoor damp & air quality (IAQ) testing.
FINRA is separately proposing a three-year pilot program to permit brokers to try out remote inspections of their branch offices.

FINRA adopted an emergency remote-inspection rule during the COVID-19 pandemic to prevent in-house compliance officers from having to do their work in person. That rule has since been extended to the end of 2023 while FINRA waits for the SEC to approve its pilot program proposal. FINRA meanwhile continues to contend with critics like the Public Investors Advocate Bar Association, which advocates for investors' interests, and the North American Association of Securities Administrators, which represents state and provincial regulators in the U.S., Canada and Mexico.

FINRA's latest response to those groups came in the form of a letter sent to the SEC on Dec. 15 to propose several amendments. Among other things, FINRA wants to put further restrictions on what sorts of firms could be qualified for remote inspections. Brokerages that had registered with FINRA only in the past 12 months would be barred from taking part in the pilot program. So would firms subject to heightened supervision restrictions like FINRA's "taping rule," which requires them to record all conversations between brokers and customers.

Read more: FINRA's hot-button proposal on remote work gains time


outsource inhouse
Many advisors think it's tough enough making sure they are in compliance with their fiduciary obligations. Now an SEC rule proposed in October would make them responsible for ensuring their subcontractors also are.

Advisors often turn to third-party companies for help with everything from software and cybersecurity to investment indexes and regulatory compliance. The SEC now wants them to keep tabs on any company to which they outsource so-called "core-advisory services." The broad definition of "covered" functions includes anything that's essential to providing financial advice in compliance with federal security laws and that's likely to materially harm clients if it were performed negligently or not at all.

Advisors who choose to outsource would have to subject their third-party subcontractors to monitoring at regular intervals and periodically reassess whether that provider is in fact the best choice. They would also have to keep detailed records of their monitoring activities and of any covered functions they've farmed out. Third parties in turn would have to keep records for any financial matters entrusted to them and provide data that federal regulators could use to track outsourcing trends in the industry.

Industry groups were quick to complain that these rules would prove overly burdensome. The SEC is taking comments on them until Dec. 27.

Read more: SEC wants advisors responsible for subcontractors' fiduciary compliance

ESG in 401(k)s?

Concept of esg
The Department of Labor announced on Nov. 22 that it had adopted a rule meant to clarify when advisors for 401(k) and similar retirement plans are allowed to take so-called ESG principles into account in the options they present to savers.

In general, the rule says that advisors may consider ESG when recommending retirement plans but aren't required to do so. ESG refers in part to the practice of considering how risks related to the environment, corporate governance or social policies could affect investors' returns.

When the DOL's new rule takes effect next year, it will replace Trump administration restrictions that DOL Assistant Secretary Lisa Gomez argued have had a "chilling effect" on ESG investment. One of those restrictions had called on retirement plan advisors to consider only "pecuniary" factors related to risks and returns when making investing decisions.

The pushback against the DOL's new rule has already begun. Many Republicans see ESG as a form of "woke capitalism" that's used to further progressive political goals rather than ensure investors are getting the most out of their money. Various GOP-controlled states have passed legislation to prevent their public-employee pension plans for investing in ESG funds. And Republican lawmakers in Congress have introduced bills seeking to curtail the DOL's plans for ESG.

Read more: Green thumbs up: DOL rule allows retirement advisors to consider ESG in offerings

Crypto in 401(k)s?

Bitcoin tumbled below $10,000 Wednesday, bringing its loss to more than 50% from a record set only a month ago.
Fidelity Investments made headlines in April with the announcement that it would begin offering digital assets accounts for retirement savers.

Although cryptocurrencies are now allowed in 401(k)s, some federal lawmakers think plan providers are still too worried about legal liability should these investments turn sour. And it's not just digital assets that are on their minds. With stocks and bonds both tanking this year, lawmakers want to make sure investors have access to a range of alternative assets including private equity, real estate and infrastructure.

The Retirement Savings Modernization Act, introduced in October, would clarify that 401(k) investments in alternatives are legally sound. The only trouble is that just over a month later the cryptocurrency exchange FTX collapsed in spectacular fashion. With more than $1 billion in FTX's investors' money still missing, lawmakers are now prone to look on crypto more with skepticism than with favor. Three Democratic senators — Dick Durbin of Illinois, Elizabeth Warren of Massachusetts and Tina Smith of Minnesota — sent a letter in November to Fidelity asking it to cease offering digital assets as a 401(k) option. And with Sen. Pat Toomey, one of the chief sponsors of the Retirement Savings Modernization Act, retiring next year, the congressional tide seems to be turning against crypto.

Read more: 401(k) bill would clarify protections for private equity, real estate, crypto investments. But do advisors want it?

Reining in the REITs

Blackstone, the largest owner of office space in the county, will look to file the prospectus for India’s first real estate investment trust listing in August, a person familiar with the matter said.
Even before the steep declines in stock and bond markets in 2022, years of low interest rates had investors looking to alternative assets for higher yields. The popular options include real estate investment trusts, which allow investors to buy into income-producing properties ranging from apartments to offices and warehouses.

One type of real estate trust that has attracted particular attention from regulators is the non-traded REIT. Unlike public REITs that are bought and sold on public exchanges much like stocks, non-traded REITs usually allow investors to get their money out only at certain times of the year.

That relative illiquidity is a risk that regulators worry unsophisticated investors may be unaware of. A series of model rules put forward by NASAA seek to prevent just anyone from putting their money into a non-traded REIT. One proposal, for instance, would raise the net income and net worth limits that determine who can invest in non-traded REITs.

NASAA is still reviewing comments it has received on its proposals. Meanwhile, skepticism of non-traded REITs has only increased following the announcement by several prominent funds — including the Blackstone Real Estate Investment Trust — that they would be limiting withdrawals next year.

Read more: Surprised by Blackstone's limit on REIT withdrawals? Advisors shouldn't be


One out unique rubber duck concept
Advisors and brokers operating independently of large firms are responsible for $47 billion a year in business, accounting for roughly 27% of the industry's total output.

That's according to a Financial Services Institute letter warning that proposed Department of Labor protections for "independent contractors" could undermine the business model that makes advisors' independence possible. The DOL's proposed rule is mainly meant to ensure that employers are not evading laws that require providing federally mandated minimum wages and other benefits to workers who should properly be classified as direct employees.

It would replace a Trump administration standard that had looked mainly at two factors: How much control workers exercise over their own work and how much they stand to profit or lose from their own activities and decisions. The new rule would instead call on federal regulators to look at the "totality of the circumstances" when deciding if someone has been properly deemed an independent contractor.

Critics like the Financial Services Institute, a trade group and lobby for independent advisors, worry the new standard would be too ambiguous. Lawsuits, they warn, will be the inevitable result as brokerage firms seek to protect their business models from encroaching government regulation.

Read more: Cetera, LPL among critics in 55K comments on DOL's independent contractor proposal

Marketing rule

marketing strategy Concept. Chart with keywords and icons
Financial planners found themselves under a new SEC marketing rule on Nov. 4.

Among other things, the rule sets a new definition for what constitutes an advertisement from financial advisors, allows for the use of testimonials from current clients, adopts new standards for reporting the performance of past investments and permits the use of investment projections in marketing. In general, it's meant to revise SEC regulations in light of changes in communication technology and gather together in a single place the many interpretations the SEC has provided on its original advertising rule since adopting it in 1961. The rule, for instance, consolidates the SEC's prohibitions and guidance relating to false and misleading advertising.

Although the marketing rule has been under discussion for years, its interpretation is still unclear to many in the industry. Planners can expect to hear plenty from regulators as they seek to understand where the new lines have been drawn.

Read more: In scramble to comply with SEC marketing rule, advisors wrestle with ambiguities

No-limit fines

Fined. Seal and open postal envelope
FINRA announced in September that it was eliminating its recommended maximum fines for violations ranging from omissions and errors to outright fraud.

Although the maximum fines are guidelines rather than requirements, they nonetheless influence penalties handed down by FINRA's own internal disciplinary board, the National Adjudicatory Council, as well as other industry watchdogs. Among other things, FINRA eliminated its maximum recommended fine of $310,000 for nine types of violations, including excessive trading, supervisory failures and illicit sales of unregistered securities. The guidelines ' penalty recommendations also vary according to whether a violator is an individual advisor, a small firm or a medium-sized or large firm. For small firms, for instance, the recommended range is from $5,000 to $16,000, although it can go as high as $150,000 when aggravating factors such as violations occurring over an extended period are present. FINRA defines small firms as those with between 1 and 150 representatives.

Read more: FINRA scraps max fines for various financial violations


Permanent Record Filing Cabinet Personal Files
For advisors and brokers who do get crossways with regulators, FINRA is seeking to make it a little harder to clear away their disciplinary records.

FINRA wants to make sure the expungement of customer complaints and other reputational complaints from BrokerCheck and other public database records remains an "extraordinary remedy."

A recently proposed rule seeks to prevent "forum shopping" by advisors who want to have their names cleared. It would do that by insisting that the officials who make up the three-person panels that oversee these cases be randomly selected from a pool of public arbitrators with training in expungement proceedings. Advisors would also be prevented from withdrawing expungement requests after the proceedings have begun.

The proposal would also limit how long broker-dealers have to make expungement requests. If the changes are adopted, brokers could wait no more than three years after the filing of a customer complaint or two years after the close of arbitration or civil litigation. And FINRA would require that customers who have submitted complaints be invited to any subsequent hearings to have their allegations expunged.

FINRA has long maintained that expungement should be used only when customer complaints are "clearly inaccurate." It notes that of the 35,000 customer complaints that were entered into its records between 2015 and 2020, only 4% were removed. Still, groups like the Public Investors Advocate Bar Association have argued expungement is too readily granted to advisors and brokers who go to the trouble of asking for it.

Read more: Off the record: Brokers have until Dec. 7 to comment on FINRA expungement proposal

SEC market overhaul

SEC headquarters in Washington, D.C., where efforts to enforce standards for brokers when dealing with retail clients are increasing.
The biggest stock and bond market overhaul to be proposed by the SEC in years could greatly add to brokers' paperwork burdens.

Among the changes in more than 1,600 pages of proposed rules is one that would have the SEC adopt a so-called Regulation Best Execution. The rule is meant to ensure brokers are regularly reviewing their trades to make sure they are still getting the best possible deals for their customers. If they find that completing the transactions in another way could have produced better results, they would have to adjust their trade policies accordingly.

The proposal is in part aimed at the payment-for-order-flow that has enabled online brokerages like Robinhood to provide commission-free stock trading. That system allows Robinhood and its competitors to collect rebates in return for routing trade orders to certain stock wholesalers. Critics have questioned if investors might not do better if their brokers shopped around for the best deals instead of simply going to the companies offering these rebates.

Whatever the reasons, the upshot for brokers is clear: They'll have to fill out a lot more paperwork to justify their trading decisions. The SEC is taking comments on the proposal at least until March 31.

Read more: Brokers could stagger under paperwork burden from SEC market overhaul
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