More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Financial services regulatory reform has been bandied about for some time now, but we got a taste of what the Obama Administration and the Securities and Exchange Commission (SEC) actually have in mind when Treasury Secretary Timothy Geithner laid out the Administration's restructuring plan during testimony before Congress March 26, and SEC Chairman Mary Schapiro told the Senate the same day what revamps the Commission hoped to accomplish.
While it's still uncertain what changes may actually get approved this year, Schapiro told Investment Advisor in an exclusive interview April 13 that she does believe "we will have some financial services reform this year." However, she remains unsure whether "it will be the full package of broad sweeping reform or whether it might be more strategic and focused in the initial stages. There are a lot of moving parts here." Indeed, Geithner said in his testimony that revamping the current financial services regulatory landscape would not take "modest repairs at the margin, but new rules of the game."
Geithner told the House Financial Services Committee during his testimony that the Administration's reform plan includes four broad components: addressing systemic risk, protecting consumers and investors, eliminating gaps in regulatory structure, and fostering international coordination. The administration also wants to put tighter controls on large financial institutions and require hedge funds to register with the SEC. Schapiro told the Senate Banking Committee the SEC also plans to ask lawmakers to craft legislation that would require investment advisors to hedge funds, as well as possibly hedge funds themselves, to register with the Commission, and that the SEC should have the power to regulate credit default swaps and municipal bonds.
Washington Bureau Chief Melanie Waddell spoke with Schapiro via telephone on April 13 to get more insight into exactly what reforms the SEC will achieve this year--she thinks harmonizing the rules for broker/dealers and advisors is a longer-term goal--and on what changes she plans to implement at the Commission.
Is something likely to happen this year on harmonizing rules for broker/dealers and advisors? Certainly we're going to try and fill the gaps, which is how I keep describing some of the issues we've been dealing with that affect auditing and custody verification and so forth in the next couple of months. But I think longer term, the bigger question of leveling the playing field between advisors and brokers will take a bit more time.
It seems to be a tough issue to pinpoint. There's a lot of lore that's grown up around both advisors and the broker/dealer side of the question, but just because it's tough doesn't mean we shouldn't tackle it. In my view it's been an issue for a long time and we owe it to investors to ensure we haven't put them in the position of having to figure out how they are best protected depending on which type of advisor they go to--a broker/dealer or investment advisor. We need to make it clear and simple for investors.
What do you think about a self-regulatory organization for advisors? It's something we're going to look at. I think it has to be a component of anything we look at.
Right along with harmonizing the rules? Absolutely. But I've said this repeatedly to anybody who's asked, I have no conclusions drawn in my mind about what the right approach is. I do know, and you've heard this undoubtedly as well, that we do not have sufficient resources here to effectively examine the more than 11,000 advisors for whom we have responsibility. That doesn't necessarily mean that we'll have to have an SRO, but it does mean we will have to leverage some third-party resources, which is one reason we're looking at things like audits [and] compliance reviews by third parties.
The compliance burden that we might see for RIAs...that would go into the audit area? I think that's probably a possibility. We're going to try and fill some of the gaps that have become apparent over the past year as we've dealt with a lot of advisor Ponzi schemes. But one of the good things about how we do rulemaking is [that] everything will go out for comment and we'll specifically seek comment on the operational costs and burdens of everything we contemplate.
So as far as the SEC not having enough people, you foresee hiring more people, maybe in the exam area? I know in your testimony before Congress you had said that you're taking a broad look at the SEC in general. What I'm concerned about in terms of examiners [being] responsible for investment advisors and mutual funds, there are about 400 people doing that. By any measure, that's going to be insufficient for the number of registrants and the amount of assets under management between mutual funds and advisors. That's why we have to be willing to explore all of the options to bring more resources to bear, whether it's directly through the SEC's budget or whether it's through leveraging third parties.
Will Congress be giving you more money for the enforcement area? We did better in the President's budget for 2010--absolutely better than we'd done ever. It wasn't our largest increase ever; we had a 9% increase, so that was very helpful. But it doesn't translate to that many more people and we have some pretty profound technology needs as well. You look at the growth in the investment advisor area--the growth is pretty astronomical in the past several years.
I've noticed a lot of the releases from the SEC on enforcement actions for the Ponzi schemes that you had mentioned. Seems like every day we have a TRO against a Ponzi scheme. It's an enormous amount of work and effort that goes into fighting these fires. But it's obviously also, as we all know from experiences of the past year, it's critically important to get to these early before they are so large that they really cause havoc across a wide swath of investors.
So have examiners been focusing more on advisors post the Bernie Madoff situation? I don't know the answer to that. We're obviously doing some things differently--we're looking at aberration returns over long periods of time. But yes, obviously we're looking back, but we also need to look ahead at what might be problems in the future.
What about the SEC having responsibility to help consumers find good advisors? Do you feel that's part of the SEC's job?
It's a great question and I'd love to believe that it's the SEC's job to help investors have access to the best possible people and the most honest people to give them investment advice. We can't be in the position of sanctioning or approving or recommending any particular advisor because it's a pretty personal relationship. But that said, we want to make sure there is adequate information publicly available so that investors can make informed decisions about somebody they might want to talk to, and then give investors some tools so that they can do their own due diligence and help them understand the kinds of questions they need to ask when they are interviewing an advisor.
Helping them understand what the different compensation models are so they can become comfortable with: Is it an hourly fee? An assets-under-management-based fee? And so forth. So we do have a responsibility to help people be armed with the kinds of questions they need to make their own decisions.
As far as hiring at the SEC, do you feel like you need more experienced people? We need different skill sets. We obviously have terrific people here, but we need some additional skill sets in financial analysis, in forensic accounting, in trading, in the hedge fund space. We need to broaden out our skills.