More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
Now that the Obama Administration has released its financial services reform plan via a White Paper June 17, it looks to be all but inevitable that the rules for broker/dealers and investment advisors will be harmonized and that broker/dealers offering investment advice will have to adhere to a fiduciary standard of care. The Obama plan calls for both of these actions to occur, but as David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington notes, "the devil is still in the details" as to how this reform will take shape. But it's clear, he says, "The debate has begun now."
Indeed, it will be up to Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, and Senator Christopher Dodd (D-Connecticut), head of the Senate Committee on Banking, Housing, and Urban Affairs, to craft legislation that puts the Obama plan in play. Both Congressmen wasted little time after the proposal's release in setting up hearings to hash over reform issues.
At press time, the House Financial Services Committee was gearing up to hold what a Frank spokesman called "a robust series of hearings" through the remainder of June and into this month, with hopes to have financial services reform legislation marked up by the end of July. The Senate Banking Committee grilled U.S. Treasury Secretary Timothy Geithner on June 18 about the Administration's plan. A Senate Banking Committee subcommittee was scheduled to hold a hearing on derivatives the week after the Obama plan was released, and more Senate Banking hearings on financial services reform were on the horizon.
Obama's plan also calls for all advisors to hedge funds to register with the SEC, but it does not include establishing a self regulatory organization for advisors (SRO). During a press briefing held June 17 at Treasury, Geithner said he could not answer the question posed to him as to whether FINRA would become the SRO for investment advisors. That may be enough to signify that the issue is not dead. No doubt the issue will rear its head during the hearings and behind the scenes in Congress and at the SEC. As Tittsworth points out, an SRO is a "simple amendment to the draft of any bill."
Commissioners at the SEC as well as FINRA CEO Richard Ketchum are also likely reluctant to let go of the idea that FINRA should have more oversight over advisors. As Ketchum noted during a recent speech to the National Association of Insured Retirement Solutions, "Regulation by an independent regulatory organization like FINRA, in my opinion at least, would best ensure that investment advisors are properly examined and their customers adequately protected."
SEC Chairman Mary Schapiro has stated publicly and in a previous interview with Investment Advisor that while she believes an SRO should be explored, she remains undecided on the details surrounding an SRO. SEC Commissioners Elisse Walters and Kathleen Casey have voiced their support that FINRA be considered as an SRO for advisors, while Commissioner Luis Aguilar is opposed to the idea. Commissioner Troy Paredes has remained mute on the issue.
The Administration's blueprint also includes creating a new Federal Services Oversight Council of prudential regulators to identify emerging systemic risks, and expanding the Federal Reserve's powers so that it can supervise all firms that could pose a threat to the nation's financial stability. Many Senators during the June 18 hearing of the Senate Banking Committee voiced their concerns about the Fed getting expanded powers. Under the plan, a new National Bank Supervisor would be formed to supervise all federally chartered banks, and an Office of National Insurance within Treasury will be formed to coordinate policy in the insurance sector. Second, there would be enhanced regulation of securitization markets, as well as stronger regulation of credit ratings agencies.
The third area would focus on protecting consumers and investors from financial abuse, creating a new Consumer Financial Protection Agency to protect consumers from fraud and abusive practices--with a focus on credit, savings, and payments markets. The Administration also seeks a "level playing field and higher standards" for providers of consumer financial products and services, whether or not they are part of a bank.
When queried on June 17 as to whether the blueprint enhances the SEC's powers, Geithner replied that the Administration does "propose giving the SEC greater authority in the broad ambit of investor protection and disclosure." If "you look at the proposals we made for bringing about reforms to the securitization markets and you go into the derivatives area, a bunch of other areas, we're proposing to clarify and expand [the SEC's and CFTC's] existing authority." The Obama plan does not suggest merging the SEC and CFTC, but says the agencies should make recommendations to Congress "for changes, statutes, and regulations that would harmonize regulation of futures and securities."
The fourth reform area is meant to improve the tools available to the government for managing financial crises. This would involve creating "a new regime" modeled on the FDIC that would allow the government to address the potential failure of even nonbank financial institutions whose failures could pose a systemic risk. The Federal Reserve's emergency lending authority would also be revised to improve accountability.
The fifth area would raise international regulatory standards and improve international cooperation.