SEC’s Uyeda Expresses Concern about SEC Overreach

Mark Uyeda

Securities and Exchange Commissioner Mark Uyeda shared his thoughts on recent SEC rules at the 2023 Investment Adviser Association Investment Adviser Compliance Conference in Washington, D.C., and expressed acute sympathy for small businesses affected by the rulemakings. He said it “frustrates me to no end that there aren’t more accommodations for small businesses.”

Specifically, Uyeda advocated for later compliance deadlines for smaller advisers in situations for which exemptions are inappropriate. Staggered implementation of rules not only allows smaller advisers more time to come into compliance, but it allows them to observe larger advisers already in compliance to see how the rule works in practice and identify policies that might work best for them.

Uyeda said he also opposes placing the compliance dates of multiple rules around the same time as each other. If an adviser has several compliance dates in quick succession, that reduces the amount of time they can spend on each one.

Karen Barr, the president and CEO of IAA, asked Uyeda about SEC enforcement actions for “technical issues” or “footfalls” in which “there is no harm to investors” and if the SEC could explore other actions, such as notices. Uyeda responded favorably and said that he does not approve of a “gotcha mentality” to enforcing minor violations that did not harm any investors.

He provided “pay-to-play” rules governing financial advisers’ political donations as an example, saying that if someone gives $300 to a governor’s race and that governor appoints members to a pension board, “Really, is that a violation?” (The answer depends on if the adviser was entitled to vote for the candidate, since the rule exempts donations of $350 or less per candidate if the adviser could vote in the candidate’s election, and $150 if they cannot.)

Uyeda said that for smaller advisory firms, the only feasible way to comply with pay-to-play rules is to not permit political donations, even if the candidate in question does not seem to be involved in appointing financial professionals for a public body or awarding contracts to financial firms.

This sentiment echoes a statement from a fellow SEC commissioner, Hester Peirce, from September 2022 in which she questioned the utility of penalizing small, one-time donations and called the rule “an exceedingly blunt instrument.”

Uyeda continued that pay-to-play rules are most critical in smaller jurisdictions in which “a $500 donation can go a long way.” If a town has a municipal pension fund of a few million dollars, then that advisory business could be easily influenced of captured, since it is likely being monitored by fewer people.

Uyeda then turned to the new outsourcing rule, which requires advisers to do their due diligence in their selection of service providers and to continue monitoring their performance. He said this rule is “very, very broad” and he is concerned about the “who and why?”

As for the who, Uyeda explained that it is not clear which providers the adviser is responsible for monitoring. Since advisers sometimes have to mail notices to clients, are they responsible for monitoring the performance of the Post Office?

As to why, Uyeda suggested that this rule is redundant, because it falls under an adviser’s fiduciary duties. At another panel at the conference, William Birdthistle, the SEC’s director of investment management, responded to this criticism by saying that the SEC’s goal is to avoid the adviser and their providers “pointing at each other” or avoiding responsibility. Requiring contractual guarantees between advisers and their providers and explicitly saying that the advisers have a duty to monitor is how the SEC is able to assign responsibility if there is a failure.

Uyeda anticipated this response earlier in the conference. He said that if there is a concern about advisers “shirking their duties” and throwing their providers under the bus, the SEC should issue guidance explaining that outsourcing “does not absolve you of your responsibility” as a fiduciary without the need for a new rule.