More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
As the Obama Administration was ringing in its first 100 days in office in early May, the Securities and Exchange Commission's enforcement division was awaiting a much-needed $40 million cash infusion that Congress promised was on its way.
Attempting to judge a President in a 100-day timeframe is challenging at best, though plenty of research firms, political pundits, and economists took a shot at assessing how Obama has fared so far and what challenges remain ahead for his Administration. For instance, TowerGroup analysts posited that while they still expect Obama to introduce "significant change" into the U.S. financial services regulatory structure, they predict the odds of a "truly uniform system across banking, securities, and insurance jurisdictions are extremely low."
The Troubled Asset Relief Program (TARP), the TowerGroup analysts say, also needs fixing, because "the lack of clarity in installing a repayment plan for the TARP has strained the relationship between bankers and the U.S. Treasury." What the Administration needs, TowerGroup says, is an "exit strategy from TARP that returns stability, risk taking, and business decision making to the banking industry." As for the stress tests that the banks have been undergoing, TowerGroup analysts say the stress test results "may fall short of probing the overall financial strength of large financial services institutions and could mask systemic issues." Most financial services firms, the Needham, Massachusetts, research firm says, "remain vulnerable to further severe and unexpected downturn conditions." What's more, the analysts argue the Obama Administration "has yet to address and fix the systemic risk issues that led to the collapse of the financial system.
Meanwhile, in the Senate
While the Administration's performance was being dissected, the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment was busy grilling on May 7 the SEC's new director of enforcement and former SEC officials about issues raised in a recent Government Accountability Office (GAO) report. That report concluded that there is a need to enhance communications and utilization of resources in the agency's enforcement division. Specifically, enforcement staff complained to GAO that they had been cut off from participating in some policy decisions. Senator Jack Reed (D-Rhode Island), chairman of the subcommittee, asked the SEC's newly christened enforcement director, Robert Khuzami, if this was so. Khuzami said that during his short time at the Commission, he has "seen nothing but shared views from the commissioners and the enforcement division."
Former SEC official Richard Hillman, who is now managing director, financial markets and community investment, for the GAO, who testified with Khuzami, said "that there will be different points of the view [at the Commission], but in the GAO report staff members said other divisions were hampering their enforcement abilities." During his time at the SEC, he continued, "we sought out the views of the other divisions happily. So by the end of the investigation we were all on the same page. There should not be a sense of competition between the divisions." Khuzami shot back that he has not "seen evidence" of competition between the divisions. "It's a highly collegial environment." He has noticed, however, that "issues just take too long to move through the different divisions." Indeed, Mercer Bullard, assistant professor of law at the University of Mississippi, and a former assistant chief counsel at the SEC, said that SEC Chairman Mary Schapiro "should encourage all members of the Commission to talk with each other, keep them advised of cases, and keep the internal debate going."
Preventing Madoff II
Other Senators queried Khuzami on what changes needed to be made in the enforcement division so that another Bernie Madoff scandal didn't slip through the cracks. Khuzami replied that there's an ongoing Inspector's General report concerning the SEC's handling of the Madoff situation. However, he said that he thinks the small number of staff members in the division along with "organization failures" contributed to the mishandling of the Madoff Ponzi scheme. "My sense is there has been a lack of urgency about the mission of the Commission," he told Congress. There were "policies or approaches that may not have been intended to be anti-enforcement but they were taken as such and that was sent down the line."
Senator Chuck Schumer (D-New York) told Khuzami that the $40 million in extra funds that the enforcement division needed "should be at the SEC soon." Schumer pointed out that the majority of the 1,100 employees in the enforcement division are lawyers and said more employees should have "knowledge of the financial world." Khuzami told Schumer that he's now planning specialized groups within the division so that he can hire "market specialists." He said he's not sure how many specialists will be hired. "It depends on which units we set up. We have many retired traders who want to help."
Schumer also noted that 40% of the enforcement division's personnel and 20% of the examiners are based in Washington, D.C., despite the overwhelming number of financial services firms in New York--where only 15% of enforcement officials are based. "This doesn't seem like enough," Schumer said. Khuzami replied that he would consider reallocating some enforcement staff. "Our specialization effort will result in nationwide teams," he said.