More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
As the New Year unfolds, one thing is certain: financial services regulatory reform will be hotly debated in the 111th Congress, and perhaps some reforms will actually be put into place. As Melanie Lubin, Maryland's Securities Commissioner, noted recently, "We face a new reality: It's clear that this crisis is going to create a new regulatory system."
Change is definitely coming, and not only in the form of financial services restructuring. As the Obama Administration is ushered in at the end of this month, we can expect "100 days of rapid fire" as Obama and his team focus on solving the "economic crisis, jobs, tax cuts (Obama will let the Bush tax cuts expire), infrastructure programs, as well as incentives for energy," said Roel Campos, the former SEC Commissioner who is also a member of Obama's economic transition team, at the Investment Advisor/Moss Adams Advisor Summit in Washington on December 2. Campos, currently the partner-in-charge of Cooley Godward Kronish's Washington, D.C. office, said that the new Administration does indeed want to tackle restructuring of financial services regulation. Having a "sane regulatory world," Campos said, is one way to help solve the current economic crisis.
To be sure, the reworking of the financial services regulatory landscape has been anticipated by the leaders of three of the top financial planning organizations--CFP Board, the Financial Planning Association (FPA), and NAPFA--and has compelled them to join forces to lobby Congress on how such reform should be implemented when it affects the financial planning profession.
Kevin Keller, CEO of CFP Board, says that the "buzzwords" being bandied about on "K Street, Capitol Hill, and at the SEC" is that when it comes to reforming financial planning services, Congress is debating some type of "harmonization or a universal standard of care." The concern among the three planning groups, Keller says, is that those words are "in effect a euphemism for a lower standard of care. We think it's in the best interest of the public that financial planning services be provided at a fiduciary level and at a level that requires a high level of competence."
When the 111th Congress convenes, Keller says, "financial services reform is one of their top priorities." The economic crisis, he says, was "clearly not caused by financial planners; what we do know is that if the financial intermediaries that got us into this mess were putting the best interests of their clients first, we probably wouldn't be in this situation." So the three planning groups want to "make sure that in any movement or legislation that might seek to impose some uniform standard of care, that the interests of the public are represented and protected and that financial planning doesn't get swept up in some broad legislation."
The top executives of the three groups held their first "exploratory" meeting on December 3, and while no date has been set for the next meeting, Keller says "there is work happening at the staff level" of each organization. "We'll be continuing to work with the other two groups."
Meanwhile, Back in the States . . .
State securities regulators participated in the North American Securities Administrators Association's (NASAA) financial services regulatory reform roundtable in Washington December 11 and gave their views on what types of regulatory reforms the new Administration and Congress should embrace. Lubin, Maryland Securities Commissioner, agrees that the financial services firms that caused the financial crisis failed to put their customers' interests first. This, she said, must change. Any broker or advisor who deals with customers "must have a fiduciary responsibility," she said. Firms have to "stop dodging the fiduciary obligation" they have.
President-elect Obama has called for a "strong set of financial regulation," Lubin pointed out, and it's time for the regulatory turf lines to vanish. "People have to behave more responsibly," she said, adding that "it's time for all of us--[members of the] industry and regulators--to take the highest road we can" and open the lines of communication.
Joe Borg, Alabama Securities Commission Director, agreed that one of the most effective ways to avert further crises going forward is to create "a horizontal cooperation among the regulators without turf battles." There's a "lack of government standards on information sharing among federal and state regulators," he said. There must be "robust information exchange" among regulators.
Denise Voigt Crawford, Texas Securities Commissioner and NASAA President-elect, warned the new Administration and Congress against reverting to "a one-size-fits-all regulatory structure." She said "different regulators bring different strengths and ideas," and stressed that state securities regulators are an "early warning system" because they often recognize problems in the investing world more quickly than regulators in Washington. "And since we're local," Crawford argued, "investors tend to have more confidence that we'll get something done."
NASAA has formally stated that its five core principles for regulatory reform in financial services must include: preserving the system of state/federal collaboration while streamlining where possible; toughen enforcement and shore up private remedies; improve oversight through better risk assessment and interagency communication; close regulatory gaps by subjecting all financial products and markets to regulation; and strengthen standards of conduct and use "principles" to complement rules, not replace them.
There are many variables to consider when debating how the new regulatory landscape should take shape. Campos argued during his speech at the Summit on December 2 that he believes the banking regulators should be consolidated as there are "too many" of them. However, the new Administration needs to "give a blessing" that there are two types of regulation--prudential regulation for banks which ensure safety and soundness and "keep panic from occurring," and a regulator for fraud deterrence and enforcement, for which the Securities and Exchange Commission is best suited. "It has been a big subject of debate whether there should be two types of regulation," Campos said. "It is necessary to keep these two systems."
As for regulation of RIAs and broker/dealers, Campos said he would encourage a new SEC Chairman to impose "a common set of rules" for both, saying it was a "historical anomaly" that there are two sets of rules for RIAs and B/Ds. However, he acknowledged that erasing that anomaly and forging one set of rules is "easier said than done." But in the current climate of change that we're in, one set of rules may not be inconceivable.