More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- The New and Improved Form ADV Whether an RIA is describing its investment strategy in advertisements or in the new Form ADV Part 2, it is important the firm articulates material risks faced by advisory clients and avoids language that might be construed as a guarantee.
Mary Schapiro has a problem. Sure, as President Obama's appointee to chair the SEC she headed the list of the most influential women in wealth management by editor-in-chief Kate McBride in the April issue of our sister publication, Wealth Manager, but surprisingly that may not help with her current challenge: It seems that Congress, as part of its frenzied, ongoing efforts to deflect any blame for the subprime meltdown, recently filleted her SEC staff over its handling (or non-handling) of the Bernie Madoff Ponzi scheme.
True, Congressional spankings are close to business as usual for the SEC staff, but the Commission's loss of face over the Madoff mess couldn't have come at worse time for Schapiro. Predictably true to form, Congress and the Obama Administration are currently focusing most of their efforts on measures to "solve" our economic woes, and at the same time, reregulate the financial services industry so "this can't ever happen again." Of course, both are worthy goals, but the wisdom of undertaking either before we've had any cogent discussion about what actually caused the meltdown escapes me. Moreover, undertaking "reregulation" at Treasury Secretary Tim Geithner's instigation before the crisis shows clear signs of waning seems premature, at best.
But financial services reregulation appears to be what we're facing, coming at a time when the SEC's political juice is at its lowest point since the dot.com crash. "The days of 'light touch' regulation are over," chairman of the House Financial Services Committee Barney Frank told the Wall Street Journal. But, as befits her status as a preeminent Washington financial services insider (her resume includes stints as an SEC commissioner, chair of Commodity Futures Trading Association, CEO of FINRA, and now head of the SEC), Ms. Schapiro has a plan to get out of the Congressional doghouse, which she revealed to Ms. McBride in an interview:
"The [SEC] has been defined over the past year not for what it's done, but for what it's missed--both in fact and in perception," said Schapiro. "We need to change that perception, but we also need to change the reality. We need to make sure that we are really recommitting ourselves here to protecting investors and being their advocate."
Mom and Apple Pie
Ah, yes indeed: "Protecting investors" is to the financial services industry what "for the children, baby seals, and polar bears" are to the Green movement. And for good reason: Who's going to argue that either isn't right up there with mom and apple pie? And who in our media-centric Congress is going to oppose Schapiro as she repositions the SEC on the side of the angels? Whether this is good news or not for independent financial advisors and financial consumers is, as yet, unclear. But with the reregulation of financial advice clearly on the table for the first time since 1940, now's the time for the advisory profession to elbow its way into a front row seat, and out-represent other interests as the advocate for financial consumers.
For her part, in her compelling interview with Ms. McBride, Mary Schapiro said all the right things (as I said, she's a real pro). When asked whether this crisis might be the catalyst for a fiduciary standard for all advisors, she responded: "I think it's entirely possible. I've said for a long time that it's really a flaw in our system that investors get different standards of care and different standards of regulatory protection depending on whether they're going to an investment advisor, a registered rep, an insurance agent, or an unregulated advisor of some sort. And it's not fair for us to leave it to investors to figure out what protections they're entitled to depending on which regulatory regime just happens to capture the person they're dealing with."
Music to my old ears, to be sure. But call me cynical (it wouldn't be the first time): Wasn't Ms. Schapiro the CEO of FINRA, the organization of, and regulator for (don't get me started), the broker/dealers who are the very source of consumer confusion about what "protection" they get? And wasn't Merrill Lynch, one of the leading FINRA firms, the subject of the FPA's suit over the application of the 40s Act "broker exemption" to fee-paid asset management? Maybe I missed it, but I don't remember Ms. Schapiro's or FINRA's amicus curiae brief to the Federal Court in support of the FPA. And wasn't the SEC the defendant in that case for writing its "Merrill Lynch" rule? (Yes, that was before Schapiro's watch, but it's the same old SEC.)
So, pardon my skepticism about Ms. Schapiro donning the "consumer advocate" mantle. She's a little late to the game, especially without revealing a road-to-Damascus, now-I-see-the-light conversion. I could be wrong here--and I hope I am--but if history means anything, I'm just saying that despite her rhetoric, maybe independent advisors and/or financial consumers shouldn't bet the farm on getting much tangible support from Ms. Schapiro's SEC at the reregulation bargaining table.
The good news is that what's left of Wall Street now has even less political juice than the SEC. Having just lost their kiesters, their firms, and tanking the world economy by failing to accurately assess the risk in CMOs (collateralized mortgage obligations) that they were repackaging and selling to investors, it's possible that even Congress and the media will see through any claims they make about being "advocates for financial consumers." Since AIG has made headlines a few times in the past year or so, insurers may not carry a lot of clout, either.
All of which means that for the first time in a long, long time, the playing field on Capitol Hill may be wide open for independent advisors to convincingly argue that they are among the only true advocates for financial consumers. Unfortunately, the independent advisory community hasn't made much progress toward either speaking with a unified voice or making a convincing argument that they are, in fact, true consumer advocates.
True, the formation of the FPA created a bigger "professional" organization. The FPA did kick out the B/Ds and win the Merrill Lynch Rule suit against the SEC. Then the CFP Board did finally add the word "fiduciary" to its Standards of Professional Conduct. But, there are also way too many "buts":
o NAPFA is still unable to play well with others, attract more than 1,000 or so members, or find a cause beyond the now moot fee-only;
o the CFP Board is still dancing around exactly when a CFP has his/her fiduciary hat on;
o the ranks of both the FPA and CFPs are largely composed of registered reps, who legally owe a greater duty to represent their B/Ds (who belong to FINRA) than their clients, at least part of the time, although no one seems to know exactly when that is.
Taken together, these size 16 feet of clay aren't likely to carry independent advisors to much of a moral high ground in Washington committee hearing rooms.
Still, there just may be enough of a story here to win the day, if the advisory community can put its heads together and tell it with one voice. Here's a humble suggestion of how that story might go:
There seems to be a growing attitude on Capitol Hill and in the media that the subprime crisis was caused in large part by the repeal of the 1933 Glass-Steagall firewall between commercial and investment banking worlds with the Financial Services Modernization Act of 1999. Despite mountains of factual evidence to the contrary, and the fact that the FSMA was passed by 98% of Republicans and Democrats in the House, and 75% of Senators on both sides of the isle, and signed by President Clinton, this theory is comforting to Democrats because all three of the bill's sponsors--Gramm, Leach, and Bliley--were Republicans.
The takeaway here is that the powers that stalk the halls in Washington now view Glass-Steagall with fond nostalgia. Perhaps the independent advisory profession could use that gone-but-not-forgotten banking Chinese Wall as an analogy for financial advice. Taking Mary Schapiro at her word, I believe that investors and other financial consumers would be best served by a Glass-Steagall clone, separating financial advice from any and all financial product manufacturing, marketing, or sales.
The new law would create professional advisory companies--much like legal or accounting firms--that could only provide advice to clients who retained them, and would be restricted from any affiliation with other types of financial services firms. The clients would pay the advisory firms directly, either hourly, on retainer, or based on assets. The advisors at these firms would have one duty, a fiduciary duty: to guide their clients to the financial products and services offered by other unaffiliated firms that will best help them meet their financial needs and reach their goals, as inexpensively as is prudent.
Within this structure, financial advisors (or whatever they would be called, which would be uniform for everyone, and self-regulated) would truly serve as gatekeepers for their clients, with underwriting firms bringing products to their attention, and custodians and other third-party providers offering their services. There would be no multiple hats, no conflicting duties, no regulatory overlap, and no consumer confusion.
Radical? Definitely. Pie in the sky? Maybe. But it's a model that works to the client/patient advantage in other professions. It's true that financial services has more than its share of conflicting agendas that would oppose such a radical change. Yet those competing voices are weaker today than ever before. The silver lining of the subprime meltdown is the creation of a public, media, and political demand for the reregulation of financial services, and an SEC that, for its own reasons, needs to go along. I guess the biggest fantasy is that professional advisors will actually have a hand in rewriting the new rules. But one can dream.
Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at email@example.com.