Brian Hamburger, JD, CRCP President and CEO...2017/02/16 · Judges rule the SEC exceeded its authority by exempting brokerage firms that charge asset-based fees from regulation under

Best Practices Trump Regulatory Compliance

T3 Advisor Conference February 16, 2017

Brian Hamburger, JD, CRCP

President and CEO

MarketCounsel | Trending T3 Advisor Conference

Brian Hamburger

Cybersecurity

Recruiting

Equity Plan Design

Succession Planning

DOL Fiduciary Rule

Mergers and Acquisitions

Automated Solutions

Outsourced CCOs

Anti-money Laundering

Examination Priorities

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Regulation S-P: “reasonable safeguards”

State data security and breach regulations

Proposed SEC Rules

Amendments to Reg. S-P

Business Continuity Planning

Dicta / exam bootstrapping

Exams: releases and sweeps

Enforcement

Areas: physical (IT), third party (cloud), staff awareness

Cybersecurity Sources


Review the firm's cyber risks. What data can be compromised by internal and external parties.?

Review the firm's policies and procedures that impact the protection of client data

privacy policy

data security plan

red flags identity theft policy

business continuity plan

Review your IT structure and ensure that it is up to date with your firm’s risks as well as current best practices,

including those published by the SEC and non-securities regulators and experts. Look at internal risks

(employees and ex-employees) as well as external risks.

Cybersecurity Review


Limit access to electronic data to those that need that access.

Pay special care to any third parties that have access to client data. Review their cybersecurity and privacy

policies. Do initial and ongoing due diligence on those providers. This should include your IT provider.

Train and educate employees. This may be the most important aspect. A knowledgeable compliance officer is

only slightly helpful. It only takes one naïve employee to open the floodgates.

Conduct testing. Test your people. Test your system. Test your providers. If you use penetration testing: i)

use a different third party to attempt to compromise your system; ii) test staff by sending fishing email and

see who clicks (don’t send a real one!); iii) remember physical facilities! (try to walk in and steal a server, look

at files, look for passwords written on post-its).

Cybersecurity Practices


If there is a breach:

plug the hole immediately

take swift and deliberate steps to mitigate the impact.

look to breach requirements in your home state and the states where you have clients whose data was

compromised.

do a thorough analysis of what went wrong.

Implement measures to limit the chances of a breach recurring in a similar manner.

Cybersecurity Breach Response


March Towards Broker-Dealer Price Competition

1968: volume discount was initiated

1971: fixed commissions were eliminated on all transactions over $500,000; non-member access discount

begun

1972: fixed commissions were eliminated on all transactions over $300,000

1973: commissions were unfixed on transactions under $2,000.

1975: Securities Acts Amendments of 1975; all fixed commissions eliminated.

The first time in 180 years that trading fees would be set by market competition.

Creative disruption led to discount stock brokers.

The Fiduciary Standard, a Historical Context


1995: Tully Report

SEC Chairman Levitt creates the Committee on Compensation Practices.

Response to concerns about actual and potential conflicts of interest in the retail brokerage industry.

Focus was on compensation practices for registered reps and branch managers and development of best

practices to eliminate, reduce or mitigate conflicts of interest.

Report found that although the existing commission-based compensation works well for most investors,

conflicts of interest persist. Thus, the establishment of ‘best practices’ to align the interest of clients, the

registered rep and the brokerage firm.



1999: SEC rule on fee-based brokerage accounts

SEC proposes a rule that would exempt brokers’ fee-based accounts from the fiduciary requirements of the

Investment Advisers Act of 1940.

In proposing the 1999 exemption, the SEC said fee-based brokerage accounts benefit investors ‘by

aligning their interests more closely” with the firm and individual broker.

No formal action.


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2005: The ‘Merrill Lynch rule’

The SEC re-proposes the 1999 rule exempting fee-based brokerage accounts from the fiduciary

requirements of the 1940 Act.

Citing “significant continuing public interest” in the proposal, the SEC on August 18, 2004 reopened the

comment period on the proposed rule.

New York Times editorial that criticized the rule proposal as “a regulatory misadventure now five years in

the running.”

Lawsuit filed by the FPA against the SEC for the SEC’s inaction on the proposal. The FPA stated that the

lawsuit was initiated in order to restore “the integrity of the Advisers Act and its protections to investors

by eliminating a loophole for broker-dealers and allowing them to operate as advisers with virtually no

disclosure of conflicts” and charged that, although never adopted, the SEC has allowed brokers to

“operate under the [proposed] exemption until the final rule was adopted.”



Final Rule, adopted April 2005

A BD providing investment advice to customers would be excluded from the definition of investment

adviser regardless of the form that its compensation takes, as long as:

the advice is provided on a nondiscretionary basis;

the advice is solely incidental to the brokerage services; and

the broker-dealer discloses to its customers that their accounts are brokerage accounts.

Not solely incidental:

Relationship includes discretionary authority;

There is a separate fee or contracts for advisory services; or

Financial planning services.




Your account is a brokerage account and not an advisory

account. Our interests may not always be the same as

yours. Please ask us questions to make sure you

understand your rights and our obligations to you,

including the extent of our obligations to disclose conflicts

of interest and to act in your best interest. We are paid

both by you and, sometimes, by people who compensate

us based on what you buy. Therefore, our profits, and our

salespersons’ compensation, may vary by product and

over time.


2006: The RAND Report

The SEC first suggested a study in connection with a rule adopted in April 2005, allowing broker-dealers to

offer fee-based brokerage accounts without being required to comply with the Advisers Act.

Twelve bidders responded to the Commission's August 1 "Request for Proposal," providing the SEC with a

range of thoughtful options.

The report confirmed investor confusion: investors had difficulty distinguishing between investment

advisers and broker-dealers and understanding the varying affiliations and other relationships among the

different firms. Focus-group participants struggled to understand the differences between the suitability

and fiduciary standards of care.



2007: ‘Merrill Lynch rule’ overturned

D.C. Circuit Court of Appeals vacates the ‘Merrill Lynch rule’.

Brokers must adhere to fiduciary duty when working with fee-based brokerage accounts.

Judges rule the SEC exceeded its authority by exempting brokerage firms that charge asset-based fees

from regulation under the Investment Advisers Act of 1940.

Critics say the SEC is lax in enforcing the ‘solely incidental’ requirement.



2009: Harmonization

Obama administration releases a report that outlines the ways to “increase fairness for investors”.

The report proposes that the SEC “establish a fiduciary duty for broker-dealers offering investment advice,

and harmonize the regulation of investment advisers and broker-dealers.”

2010: Dodd-Frank Act

President Obama signs the Dodd-Frank financial reform law, which gives the SEC the authority to

promulgate a uniform fiduciary duty standard for retail investment advice that is no less stringent that than

the 1940 Act.

The measure provides safe harbor for several brokerage activities, including charging commissions, selling

proprietary products and principal trading.

It also limits the continuing duty of care.



2010: DOL releases fiduciary rule

In September, the DOL proposes a rule designed to limit conflicts of interest for financial advisors working

with clients with respect to retirement accounts.

2011: SEC report favors uniform fiduciary

In January, the SEC staff issues a report recommending the commission propose a uniform fiduciary duty

rule.

2011: DOL withdraws rule

In the face of industry criticism, the DOL withdraws its proposed conflicts of interest rule.




0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Wirehouse Independent RIA


2013: SEC seeks cost-benefit feedback

SEC releases a request for comment on the costs and benefits of a uniform fiduciary duty rule and

harmonization of adviser and broker regulations.

The SEC has not published the results of this comment request.

2013: New DOL Secretary

At his confirmation hearing, Mr. Perez promises to listen to stakeholders before deciding how to proceed

with the fiduciary rule.

2015: Obama demands progress

In February, President Obama directs the DOL to re-propose its fiduciary duty rule.

Mr. Obama says protecting workers and retirees from conflicted advice would shield more than $17 billion

in savings lost annually to inappropriate high fees.



2015: White announces support

In March, SEC Chairwoman Mary Jo White announces her support for a fiduciary duty rule, but cautions

that she must find support from two of the other four bipartisan commissioners to propose a rule.

2015: DOL re-proposes rule

In April, the Labor Department proposed a new rule requiring fiduciary advice for retirement accounts.

2015: Comment period, hearings

Following an initial comment period, the DOL holds four days of hearings on the fiduciary rule in August.

A second comment period closes in late September. The agency receives more than 3,000 letters about the

proposed rule.

2015: Political sides drawn

The financial industry, Republican lawmakers and SEC commissioner Daniel Gallagher attack the rule as

“unworkable” as legislation is introduced that would attempt to block the rule

Proponents, led by Sen. Elizabeth Warren, D-Mass., and consumer groups, rally Democrats to stand with

the administration.



2016: Rule heads to OMB

On Jan. 29, the DOL sends the rule to the Office of Management and Budget for review.

The final rule is expected to be released in March or April. Additional attempts to scuttle it — through

legislation or lawsuits — are anticipated.

2016: DOL issues final fiduciary rule

On April 6, the Labor Department releases its final version of the fiduciary rule, including changes to many

areas the industry opposed.

Congress will have 60 days to review the rule after it is published in the Federal Register.

If lawmakers vote to rescind it, the resolution likely would be vetoed by President Barack Obama.

Full compliance will be “phased in” and won't be required until Jan. 1, 2018.



2016: Trump defeats Hillary

Trump wins the presidential election.

The Republicans maintain control over both houses of Congress.

Expectation is that the DOL rule will be delayed if not repealed.



2017: Trump issues executive order to delay the DOL rule

Initial reports suggested DOL rule would be delayed by 180 days.

The delay would allow the DOL time to do an analysis on the impact of the Rule and determine if it should

revised or rescinded.

The order however did not include a 180 delay. Only the DOL can delay the Rule.

2017: Trump and DOJ Appeal For Delay

Hours before the Texas ruling, the Department of Justice, the lawyers for DOL, had requested a stay in the

case until after the President’s mandated review is done.

The Texas ruling found the fiduciary rule does not exceed the DOL’s authority, and the DOL did not exceed

its statutory authority to grant conditional exemptions.

Judge Lynn is the second judge to grant summary judgment to the DOL on the fiduciary rule. Judge Moss of

the District of Columbia District Court also granted summary judgment. That case is on appeal to the DC

Circuit.


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Brian Hamburger, JD, CRCP President and CEO...2017/02/16 · Judges rule the SEC exceeded its authority by exempting brokerage firms that charge asset-based fees from regulation under