Compliance and SIFMA in 2016

In a recent article written for the website On My Wall Street, writer Andrew Welsch discussed the possibility of an impending compliance storm in the wealth management industry. Specifically, Welsch was writing about retirement accounts and trusts, which could soon be subject to two or more different (and potentially conflicting) government standards. The piece was written in response to a quote from SIFMA CEO Ken Benston, who said that retirement accounts would be exposed to a “compliance nightmare” if the Labor Department continues with plans to implement a new fiduciary rule.

Understanding the Situation

A first read-through of Welsch’s piece might be a bit confusing if you are not familiar with the players involved or with how retirement accounts work. Indeed, there are a lot of different pieces of the chessboard in this particular conversation, including SIFMA, the Labor Department, the SEC, and FINRA. To better understand the “compliance nightmare” mentioned in Welsch’s article, let’s first take a look at what each of these organizations actually does.

  • SIFMA. The Securities Industry and Financial Markets Association is an industry trade group that was founded in 2005. SIFMA is not a government organization and is not involved directly in either of the current campaigns to pass and implement new compliance rules for retirement funds and the fiduciaries (or investment firms) that set them up. However, SIFMA does have a vested interest in the situation, as the trade group is tasked with representing the interests of banks, securities firms, and asset management companies. In other words, SIFMA’s constituents are the businesses that would actually have to comply with a new fiduciary regulation, if one were introduced.
  • The Labor Department. According to Welsch’s article, the United States Department of Labor is currently in the process of crafting a fiduciary rule “with regard to retirement advice.” On one hand, the Labor Department says that any regulatory rule they introduce would be positive for retirement investors. The Labor Department is the agency that enforces ERISA (the Employee Retirement Income Security Act), which is the 1974 legislation that set standards for retirement plans in the first place. Because of their ties to ERISA, the Labor Department believes that they are well equipped to further regulate retirement investing firms with a fiduciary rule.
  • The SEC (Security and Exchange Commission). The issue with the SEC is that it has already been tasked with creating a fiduciary rule under the Dodd-Frank Wall Street Reform and Protection Act. Dodd-Frank, which was passed in 2010, included a measure authorizing the SEC to create a “fiduciary duty” standard for all investment firms. Essentially, such a standard would require investment management companies to handle retirement accounts with only the best interests of their clients (the investors) in mind. Specifically, such a rule would seek to eliminate conflicts of interest that might influence a fiduciary’s investment choices in regards to a person’s retirement fund.So far, the SEC has been slow to propose such a rule, hence the Labor Department’s move to establish one on their own. However, SIFMA still believes that the SEC is the most likely to create a fiduciary rule that would not just protect investors, but also investor choices. Furthermore, since the SEC will supposedly create a fiduciary rule eventually, as is their duty under Dodd-Frank, SIFMA worries that the current narrative could lead to two conflicting standards—thereby making it difficult for investment firms to remain compliant with both.
  • Lastly is the Financial Industry Regulatory Authority, a private organization that regulates brokerage firms and securities markets. Were the SEC to pass a fiduciary rule, FINRA would likely be tasked with ensuring that investment firms were staying compliant. SIFMA is worried that, with both FINRA and the Department of Labor auditing firms and financial advisors for conflicts of interest in retirement investing, the industry will be in the midst of a compliance nightmare that would bring about both “cost and confusion.” For the record, FINRA agrees that the Department of Labor’s proposed fiduciary rule is misguided.

 

How a Compliance Storm Might Be Handled

Situations like the one described above are nerve-wracking to businesses for several reasons. The first and most obvious reason in this particular case is the potential for conflicting standards. When one regulator is saying one thing and a second regulator is saying another, who do you listen to?

Secondly, and in more general terms, two different compliance standards would just force investment companies to answer to two different regulators. Even if the Department of Labor and SEC standards end up being complementary or compatible, financial advisors would still have to do more paperwork, keep more records, and face more audits. Such a situation would reduce the time that an advisor could actually spend serving his or her clients—which could, in turn, boost prices and make retirement funding options less accessible to investors.

In such a situation, one can see how a high-quality electronic document management system (or DMS) could be a make-or-break factor. The need for companies to stay compliant with government standards was a big part of the reason that electronic DMS software rose to prominence in the first place. From organizing documents in such a way that anything can be found quickly, to making sure certain files are always secure, DMS provided advantages that paper filing systems couldn’t.

Today, as a compliance storm looms in the retirement investing world—and as government standards for electronic communication and file management will continue to become more common across all industries—DMS software is more important than ever. A program like eFileCabinet, offering features like text-based search, custom file organization, audit trails, file encryption, and a secure client portal—perfect for remote audits—might prove to be a saving grace for an investment firm trying to show compliance with fiduciary rules from both the SEC and the Department of Labor.

Are you interested in learning more about eFileCabinet and its wealth of different features? Visit our website at www.efilecabinet.com.

Understanding the Situation

A first read-through of Welsch’s piece might be a bit confusing if you are not familiar with the players involved or with how retirement accounts work. Indeed, there are a lot of different pieces of the chessboard in this particular conversation, including SIFMA, the Labor Department, the SEC, and FINRA. To better understand the “compliance nightmare” mentioned in Welsch’s article, let’s first take a look at what each of these organizations actually does.

  • SIFMA. The Securities Industry and Financial Markets Association is an industry trade group that was founded in 2005. SIFMA is not a government organization and is not involved directly in either of the current campaigns to pass and implement new compliance rules for retirement funds and the fiduciaries (or investment firms) that set them up. However, SIFMA does have a vested interest in the situation, as the trade group is tasked with representing the interests of banks, securities firms, and asset management companies. In other words, SIFMA’s constituents are the businesses that would actually have to comply with a new fiduciary regulation, if one were introduced.
  • The Labor Department. According to Welsch’s article, the United States Department of Labor is currently in the process of crafting a fiduciary rule “with regard to retirement advice.” On one hand, the Labor Department says that any regulatory rule they introduce would be positive for retirement investors. The Labor Department is the agency that enforces ERISA (the Employee Retirement Income Security Act), which is the 1974 legislation that set standards for retirement plans in the first place. Because of their ties to ERISA, the Labor Department believes that they are well equipped to further regulate retirement investing firms with a fiduciary rule.
  • The SEC (Security and Exchange Commission). The issue with the SEC is that it has already been tasked with creating a fiduciary rule under the Dodd-Frank Wall Street Reform and Protection Act. Dodd-Frank, which was passed in 2010, included a measure authorizing the SEC to create a “fiduciary duty” standard for all investment firms. Essentially, such a standard would require investment management companies to handle retirement accounts with only the best interests of their clients (the investors) in mind. Specifically, such a rule would seek to eliminate conflicts of interest that might influence a fiduciary’s investment choices in regards to a person’s retirement fund.So far, the SEC has been slow to propose such a rule, hence the Labor Department’s move to establish one on their own. However, SIFMA still believes that the SEC is the most likely to create a fiduciary rule that would not just protect investors, but also investor choices. Furthermore, since the SEC will supposedly create a fiduciary rule eventually, as is their duty under Dodd-Frank, SIFMA worries that the current narrative could lead to two conflicting standards—thereby making it difficult for investment firms to remain compliant with both.
  • Lastly is the Financial Industry Regulatory Authority, a private organization that regulates brokerage firms and securities markets. Were the SEC to pass a fiduciary rule, FINRA would likely be tasked with ensuring that investment firms were staying compliant. SIFMA is worried that, with both FINRA and the Department of Labor auditing firms and financial advisors for conflicts of interest in retirement investing, the industry will be in the midst of a compliance nightmare that would bring about both “cost and confusion.” For the record, FINRA agrees that the Department of Labor’s proposed fiduciary rule is misguided.

 How a Compliance Storm Might Be Handled

Situations like the one described above are nerve-wracking to businesses for several reasons. The first and most obvious reason in this particular case is the potential for conflicting standards. When one regulator is saying one thing and a second regulator is saying another, who do you listen to?

Secondly, and in more general terms, two different compliance standards would just force investment companies to answer to two different regulators. Even if the Department of Labor and SEC standards end up being complementary or compatible, financial advisors would still have to do more paperwork, keep more records, and face more audits. Such a situation would reduce the time that an advisor could actually spend serving his or her clients—which could, in turn, boost prices and make retirement funding options less accessible to investors.

In such a situation, one can see how a high-quality electronic document management system (or DMS) could be a make-or-break factor. The need for companies to stay compliant with government standards was a big part of the reason that electronic DMS software rose to prominence in the first place. From organizing documents in such a way that anything can be found quickly, to making sure certain files are always secure, DMS provided advantages that paper filing systems couldn’t.

Today, as a compliance storm looms in the retirement investing world—and as government standards for electronic communication and file management will continue to become more common across all industries—DMS software is more important than ever. A program like eFileCabinet, offering features like text-based search, custom file organization, audit trails, file encryption, and a secure client portal—perfect for remote audits—might prove to be a saving grace for an investment firm trying to show compliance with fiduciary rules from both the SEC and the Department of Labor.

Are you interested in learning more about eFileCabinet and its wealth of different features? Visit our website at www.efilecabinet.com.

By | 2016-12-15T11:58:57+00:00 December 28th, 2015|
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