More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
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.