Polishing a crystal ball to predict future actions by any regulator can be a nearly impossible task.

These agencies, by nature, are typically a step behind marketplace trends and risks. Much of the regulatory agenda submitted to the White House on a semi-annual basis pursuant to the Regulatory Flexibility Act has traditionally been treated as check-the-box, grunt work that offered little in the way of specifics or actionable timelines.

For observers of the Securities and Exchange Commission, these old assumptions have changed under the watch of SEC Chairman Jay Clayton. Early in his tenure, he pledged greater transparency into not just the Commission’s rulemaking process, but the timing and order of those initiatives. The plan hasn’t been perfectly realized, but it has been a marked improvement over a regulatory calendar he has called “too aspirational.”

During testimony before the Senate Banking Committee in December, Clayton said his Commission advanced 23 of the 26 rules itemized in its near-term agenda, “a good result on both a percentage basis (88 percent) and an absolute basis.”

The SEC’s 2019 regulatory agenda is a mix of leftover initiatives, proposed rules, and a final enactment of previously proposed rules. Among the highlights:

  • Amendments under the Exchange Act to prescribe capital and margin requirements for security-based swap dealers and major security-based swap participants pursuant to the Dodd-Frank Act;
  • Amendments to the capital requirements for broker-dealers;
  • Rules and amendments to establish segregation requirements for security-based swap dealers and major security-based swap participants;
  • New rules and amendments to allow funds to acquire shares of other funds, including arrangements involving exchange-traded funds, without first obtaining exemptive orders from the Commission;
  • Harmonizing Dodd-Frank Act swap rules with those by the Commodity Futures Trading Commission;
  • Extending the availability of the Regulation A exemption;
  • Regulating registered investment companies’ use of derivatives and require enhanced risk management measures;
  • Amendments to Regulation S-X that affect the disclosure of financial information of acquired businesses; and
  • Rule amendments mandating the independence of an accountant when they have a lending relationship with an entity that holds equity in one of their clients.

Also planned for 2019 are amendments to the Commission’s whistleblower program rules, including monetary awards to tipsters who facilitate successful enforcement actions with monetary sanctions of more than $1 million.

One proposed change would prevent a whistleblower from receiving multiple recoveries for the same information from different whistleblower programs.

“There was consensus among the panelists that the proxy ‘plumbing’ needs a major overhaul.”

Jay Clayton, Chairman, Securities and Exchange Commission

Another change would clarify the Commission’s ability to bar individuals from submitting whistleblower award applications if they are discovered to have submitted false information to the Commission. The SEC would also be empowered to bar individuals who repeatedly make frivolous award claims.

A continued push for ‘fiduciary duty’

The SEC will pursue efforts to finalize rules “relating to the standards of conduct for financial professionals,” establishing a “best interest” standard for broker-dealers and investment managers. The effort is intended to replace a vacated “fiduciary duty rule” from the Obama administration’s Labor Department.

The proposed rules seek to require broker-dealers to act in the best interest of their retail customers, “by expressly requiring that the investment professional not place her or his interests ahead of the interests of the client.” The rule is also intended to require both broker-dealers and investment advisers to disclose key facts about their client relationships, including financial incentives.

“This is a very important and long overdue initiative,” Clayton told the Senate Banking Committee. SEC staff, he said, is currently reviewing more than 6,000 comment letters as they work to develop final recommendations.

Rethinking proxy access

Another significant initiative for 2019 and beyond, according to Clayton, will be improving the proxy process.

In November, SEC staff convened a proxy roundtable to discuss the proxy solicitation and voting process, shareholder engagement through the shareholder proposal process, and the role of proxy advisory firms.

“There was consensus among the panelists that the proxy ‘plumbing’ needs a major overhaul,” Clayton said.

The day-long roundtable encouraged market participants to explore what such an overhaul would entail and consider how technology, including distributed ledger technology, could improve the proxy process.

There are already some key takeaways from those discussions that may influence rulemaking and policy changes in the year ahead.

“It is clear that we should consider reviewing the ownership and resubmission thresholds for shareholder proposals,” Clayton said. “The current $2,000 ownership threshold was adopted 20 years ago, and the resubmission thresholds have been in place since 1954. A lot has changed since then. We need to be mindful of these changes and make sure our approach to the very important issue of shareholder engagement reflects the realities of today’s markets and investors.”

As for proxy advisory firms, he cited “growing agreement” that changes are warranted in how these independent advisory firms conduct their business. Specifically, “there should be greater clarity regarding the division of labor, responsibility, and authority between proxy advisors and the investment advisers they serve.”

Cashing in on capital formation

Low-hanging fruit for the SEC in the New Year is likely to come from Congressional actions that enjoyed bipartisan support in 2018. This would supplement the recently expanded confidential IPO filing process (previously restricted to emerging growth companies, it can now be deployed by any company) and allow pre-public companies a means to assess investor interest before beginning the extensive (and expensive) SEC filing and review process for going public.

The SEC’s Division of Corporation Finance also plans to look into the private offering framework. “Our patchwork private offering system is complex, and it is time to take a critical look to see how it can be improved, harmonized, and streamlined,” Clayton told the Senate.

The Commission is similarly working on a concept release to solicit input about key topics, including whether its existing accredited investor definition (the regulatory qualifications and thresholds for participation in private offerings) is appropriately tailored to address both investment opportunities and investor protection concerns.

Social media regulation

Beyond the SEC, Congress may finally step up to the plate and vote on comprehensive laws pertaining to how tech companies, especially social media firms, collect, use, sell, trade, and secure the personal data of their users.

Examination priorities

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations recently announced its 2019 examination priorities. In the year ahead, expect a particular emphasis on digital assets, cyber-security, and “matters of importance to retail investors,” including fees, expenses, and conflicts of interest.


In Fiscal Year 2018, OCIE completed over 3,150 examinations, a 10 percent increase over the previous year.


Each of OCIE’s examination programs will prioritize cyber-security “with an emphasis on, among other things, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security,” the end-of-year advisory says.


The OCIE will emphasize cyber-security practices at investment advisers with multiple branch offices, including those that have recently merged with other investment advisers and continue to focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.


“In assessing how firms prepare for a cyber-security threat, safeguard customer information, and detect red flags for potential identity theft, we have focused on areas including risk governance, access controls, data loss prevention, vendor management, and training, among others,” SEC Chairman Jay Clayton said of broader Commission efforts.


Upcoming firm examinations will also review policies and procedures addressing conflicts of interest by investment advisers, including those who utilize services or products provided by affiliated entities. “These arrangements present conflicts of interest related to, among other areas, portfolio management practices and compensation arrangements,” The OCIE warned.


Other priorities: investigating “non-purpose” loans and lines of credit that allow borrowers to use the securities in their brokerage or advisory accounts as collateral to obtain a loan. The OCIE has observed that advisers, broker-dealers, and their employees often receive financial incentives to recommend these products to clients.


The OCIE also plans to review how broker-dealers oversee their interactions with senior investors, with an eye toward exposing financial exploitation. These examinations will focus on compliance programs and the appropriateness of investment recommendations.


Examiners will continue to prioritize examining broker-dealers for compliance with their anti-money-laundering obligations, including whether they are meeting Suspicious Activity Report filing obligations and regularly conducting independent tests of their AML program.


—Joe Mont

The latest push in that direction, after several high-profile House and Senate hearings, came on Dec. 19 when District of Columbia District Attorney General Karl Racine sued Facebook “for failing to protect its users’ data, enabling abuses like one that exposed nearly half of all District residents’ data to manipulation for political purposes during the 2016 election.”

In its lawsuit, his office alleges Facebook’s lax oversight and misleading privacy settings allowed, among other things, a third-party application to use the platform to harvest the personal information of millions of users without their permission and then sell it to a political consulting firm.

Facebook also failed to inform consumers that it granted certain companies, many of which were mobile device makers, special permissions that enabled those companies to access consumer data and override consumer privacy settings, the lawsuit says.

The question may not necessarily be whether Congress acts, but how.

Pursuing a law comparable to Europe’s General Data Protection Regulation privacy rules “would have a major impact on information technology practices in the U.S.,” says Dr. Barbara Rembiesa, president and CEO of the International Association of IT Asset Managers.

“The recent Facebook discovery has people looking for the adoption of something like GDPR in the U.S. faster than anticipated,” she says. “It seems that people feel they are able to make decisions about their personal data better than any company or organization would.”

Assuming a bill like GDPR is passed in the United States, the next question is how corporations will adopt the new regulation. Organizations in the European Union currently use data protection officers for handling compliance, and many U.S.-based companies are actively recruiting DPOs in preparation for what is to come, Rembiesa said.

Rules come, rules go

There was a telling market crash in late December that was sparked by liquidity concerns at major banks.

Treasury Secretary Steven Mnuchin, amid pre-holiday market volatility, took time out from a Cancun vacation to call up executives at six of the nation’s largest banks. The calls “confirmed that they have ample liquidity available for lending to consumers, business markets, and all other market operations,” a statement regarding the calls said.

The problem: The out-of-the-blue phone calls, rather than ease market concerns, doubled down on them. Where there is smoke, it was feared, there might very well be fire.

The call, and Mnuchin’s telegraphed concerns about liquidity, come as the Trump administration, and a surprisingly bipartisan coalition in Congress, is looking to roll back financial regulations and key components of the Dodd-Frank Act. The irony: Many of those rules directly address capital buffers and liquidity standards at big banks, the very matters the Treasury Department, intentionally or not, stoked fears regarding.

Nevertheless, more rollbacks are afoot in 2019, including final rules to scale back the effect of the Volcker Rule, a Dodd-Frank Act prohibition in proprietary trading by banks.

The move is one of many demanded by the Economic Growth, Regulatory Relief, and Consumer Protection Act, an effort to tailor regulations to the size and complexity of financial institutions.

On Dec. 21, the five federal financial regulatory agencies that jointly oversee the Volcker Rule initiated comment on a proposal that would exclude certain community banks from its requirements.

They are proposing to exclude community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5 percent or less of total consolidated assets from the restrictions of the Volcker Rule.

The perils of consumer protection

From its inception, the Consumer Financial Protection Bureau has been a controversial beast. In recent months, it has faced political whiplash, going from the consumer advocacy and business attacks of original Director Richard Cordray, to the cut-to-the-bone gutting of resources and mission by his replacement, Acting Director Mick Mulvaney.

Heading into 2019, all eyes turn to the newly confirmed director Kathy Kraninger. Will she continue, or step back from, efforts to diminish the Bureau’s profile and purview, a stated goal of numerous Republican critics.

Also, what effect will Democrats retaking the House and putting Mulvaney before Maxine Waters, chair of the House Financial Services Committee, have?

An early indication will be whether the CFPB continues to pursue an in-progress easing of regulations on payday lending firms.

Another early litmus test for Kraninger will be her response to a December report from the U.S. Government Accountability Office, a bipartisan watchdog. It accuses the Bureau of failing to have a systemic process in place for identifying and prioritizing consumer risks.