More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
As new Treasury Secretary Timothy Geithner was preparing to announce a four-pronged revamp of the bank bailout package--which would include a "bad bank" that allows banks to purge themselves of bad assets--and debate on the stimulus package waged on (the Senate passed its version of the House's H.R. 1 on February 10), a consensus was emerging among lawmakers that the Federal Reserve be named the systemic risk regulator overseeing all financial services activities. Meanwhile, SEC Chairwoman Mary Schapiro was laying the groundwork for a significantly beefed up enforcement division at the Commission, just as its current director, Linda Chatman Thomsen, abruptly resigned after being lambasted recently by Congress over the SEC's failure to detect the Bernie Madoff Ponzi scheme.
In setting out his agenda for this year, Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, told reporters in early February that one of the most important near-term issues for Congress and the new Administration to tackle is systemic risk. "The biggest single problem we've had here is not just in subprime loans," Frank said. "There have been too few constraints on major financial institutions incurring far more liability than they could handle." That's why it's paramount to empower a systemic risk regulator, he said, which will likely be the Federal Reserve.
Frank said the systemic risk regulator--which Congress hopes to have in place by the middle of the year--"will have some flexibility as to what the reach is," but "you cannot define this too specifically legislatively, because if you do, people will get around it." Frank noted, however, that the Fed's new duties to constrain excessive risk taking would not "take away from the SEC or the CFTC or any of the bank regulators." The Congressman added that "complete transparency for hedge funds has to be part of the systemic risk operation."
Where the Congress Stands
Just what changes Congress has in store for the SEC under financial services reform have yet to unfold. However, Rep. Paul Kanjorski (D-Pennsylvania), chairman of the House Financial Services Subcomittee on Capital Markets, issued a stern warning to SEC senior staff, during a hearing on the Madoff scandal in early February, saying the agency's fate could be changed under the reforms being worked out in Congress.
During her testimony before the Subcommittee on Capital Markets, Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations (OCIE), again noted the inadequate number of examiners. OCIE has 425 examiners for investment advisors and 365 examiners for broker/dealers, she said. "Notwithstanding the explosive growth in the firms it examines and inspects, the staff of the Office has 90 fewer positions than it had at its high-water mark in FY 2006," she said.
To empower the SEC's enforcement staff, Schapiro told a group of lawyers in Washington in February that she would end the Commission's two-year "penalty pilot" experiment, "which had required the Enforcement staff to obtain a special set of approvals from the Commission in cases involving civil monetary penalties for public companies as punishment for securities fraud." The procedures, she said, have introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve one; and reduced the size of penalties imposed.
Schapiro said she also plans to provide more rapid approval of formal orders of investigation. "When I was a Commissioner, formal orders were routinely reviewed and approved within a couple of days by the Commission or by a single Commissioner acting promptly and on behalf of the entire Commission," she said. Today, however, many formal orders of investigation "are made subject to full review at a meeting of all five Commissioners, necessitating that they be placed on the calendar sometimes weeks in advance."
Other priorities for Schapiro would include creating an Investor Advisory Committee so that the SEC can hear investor concerns first-hand; improving the quality of credit ratings by addressing the inherent conflicts of interest credit rating agencies face as a result of their compensation models and limiting the impact of credit ratings on capital requirements of regulated financial institutions; reducing systemic risk to investors and markets by promoting--and regulating appropriately--centralized clearinghouses for credit default swaps; strengthening risk-based oversight of broker/dealers and investment advisors; and improving the quality of audits for nonpublic broker/dealers and promoting the safe and sound custody of customer assets by any broker/dealer or investment advisor.