More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The SEC announced September 20 a temporary rule regarding principal trades with investment advisory accounts, Section 206(3) of the Advisers Act, which is intended to make October 1 compliance with the rollback of the broker/dealer exemption rule easier to accomplish. The original rule, also known as the Merrill Lynch rule, which exempted brokers from regulation as an investment advisor even when they were being paid fees for investment advice in fee-based brokerage accounts, was vacated last spring by the U.S. Court of Appeals for the D.C. circuit after a challenge by the Financial Planning Association (FPA).
Temporary Rule 206(3)-3T, due to expire December 31, 2009, applies to non-discretionary advisory accounts. To comply, advisors will have to disclose in writing any conflicts regarding the principal trades; get prior, written, revocable permission from clients to do principal transactions; disclose and get oral or written consent before each trade; disclose by confirmation whether the advisor has acted as principal and confirming that the client gave permission for that; and provide each client with an annual, itemized report on principal transactions with that client. The investment advisor must be dually registered as a broker/dealer.
The SEC wrote in its announcement that the temporary rule "will not relieve an investment adviser from its fiduciary obligations imposed by the Advisers Act or by other applicable provisions of federal law. These obligations include fulfilling the duty to seek best execution of client transactions, as well as the duty to disclose material facts necessary to alert clients to the adviser's potential conflicts of interest."
The SEC is seeking comments on the temporary rule by November 30, 2007. (To see the full text of the SEC announcement, click here).
On the same day, the SEC also adopted what's been dubbed the Gramm-Leach-Bliley Act's broker/dealer rules, which the Commission says ended eight years of stalled negotiations and impasse. The Commission voted jointly with the Board of Governors of the Federal Reserve System (Board), to adopt new rules that will finally implement the bank broker provisions of the Gramm-Leach-Bliley Act of 1999. The Board will consider the final rules at its September 24 meeting. In addition, the Commission also voted to issue a second release concerning certain bank dealer activities and other related matters. "A customer should be able to walk into a financial institution and get any financial product he or she needs--securities, insurance, banking, or trust services," said SEC Chairman Christopher Cox.