Regulators add valuation of private securities to their focus on the basics. Brian Hamburger says he gets up to five calls a day from wirehouse brokers looking to set up their own advisory firms, and, he says, they tend to say the same thing: "I'm looking to set up a pretty typical wealth management firm." Hamburger, the founder of the Hamburger Law Firm and MarketCounsel, a regulatory compliance consulting firm based in Englewood, N.J., is quick to disabuse them of the notion: "There isn't anything typical about a wealth management firm!" With his background in the enforcement division of the SEC, as chief compliance officer for an SEC-registered RIA, and as an arbitrator on the FINRA Dispute Resolution Board, Hamburger knows what can go wrong with a wealth management firm from a compliance standpoint.
When asked if regulations are more of a burden these days because they are constantly changing, Hamburger demurs. "For investment advisors, there's very little movement from either state or federal regulators where they actually push through regulation." Instead, he says there are two factors that keep compliance "in flux." The SEC has regulatory preferences where it focuses on different areas based on perceived risks "without regard to new regulations. So after 9/11 it was a lot of business continuity issues and safety and security of data. More recently it's been valuation and performance standards." The other factor is civil liability. "Whenever there is a downward trend in the market," Hamburger reports, "our litigation practice increases in activity." He's quick to point out, however, that it's not simply a question of poor investment performance. Those who get sued, he says, "tend to be the ones who have responded poorly to bad performance...by putting your head in the sand and not maintaining communications with your clients. Bad performance tends to be something that most clients can sustain if they feel that the guy they've hired is doing everything to look out for their best interests. The guys that are doing that may get fired for poor performance, but they're not getting sued."
As for the SEC, he says it is getting back to basics in its recent exams--looking at "old-school issues" like insider trading, front running, and soft dollars. "The other thing coming up over the last year-plus" in exams, he says, is "valuation--many clients are starting to hold private securities or other assets that are difficult to value." It presents a conflict of interest to advisors, since their fees are based on the overall value of the portfolio, but he says it's a "tough one for regulators to get their arms around it, too."
James J. Green is Editorial Director of Wealth Manager.