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.
- 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.
Financial services reform continues to unfold, with two pieces of legislation being sent to Capitol Hill in July aimed at protecting investors--the first establishing a Consumer Financial Protection Agency (CFPA) and the other, the Investor Protection Act of 2009, which would strengthen the Securities and Exchange Commission's (SEC) authority.
Much debate is already taking place concerning the CFPA, with many questioning how this new agency would interact with other regulators. Under the proposed legislation, quite a broad range of products would fall under the CFPA's jurisdiction, namely banking products, mortgages, and credit cards. But it looks as though mutual funds will be kept under the SEC's purview. Michael Barr, assistant Treasury secretary for financial institutions, told reporters on a July 10 conference call that additional pieces of the Administration's financial services reform plan would be released "in the coming weeks," including more items affecting the SEC. Some of those reform plans were released in mid-July, including requiring all advisors to hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the SEC.
Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, introduced a bill in mid-July, H.R. 3126, that formally includes the Obama Administration's proposal to create the CFPA. Frank hopes to mark up the bill by the end of July with approval likely before the August 7 recess. While Frank said there's a "great deal of common ground" between his bill and President Obama's, Frank's bill preserves the current federal banking regulators' role to enforce the Community Reinvestment Act (CRA). In addition, Frank said "the Administration's proposal presupposes the creation of the National Bank Supervisory (NBS), a new prudential regulator that would merge the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). While this is consistent with the Administration's goals for regulatory restructuring, these considerations will be done at a later date. Accordingly, the introduced bill makes references to the OCC and OTS, instead of the NBS."
During a July 14 hearing that Frank's committee held on the CFPA, the Congressman said it was time to create such a "consumer watchdog" because other regulators have let consumer protections fall by the wayside.
Make or Enforce the Law?
But other members of Frank's committee questioned whether the CFPA would be a law enforcement agency or a law-making agency that could preempt Congress. Elizabeth Warren, chair of the Congressional Oversight Panel and the Leo Gottlieb Professor of Law at Harvard University, assured lawmakers at the hearing that Congress "will set the standards" for the CFPA and the agency, if established, will put these into force.
Frank noted during the hearing that securities enforcement should be left to the SEC, which plays a big part in investor protection. He suggested "beefing up" the SEC's role when it comes to investor protection. In her testimony before the House Financial Services Subcommittee on Capital Markets July 14 (see sidebar), SEC Chairman Mary Schapiro said that she expects the SEC "would work closely with the CFPA if it is created and that there would be areas of overlap" when it comes to regulation.
Under the proposed CFPA bill, financial advisors under the CFPA's purview would include those who provide "financial and other related advisory services; educational courses and materials on financial matters; or credit counseling, tax-planning, or tax-preparation services." Dan Barry, director of government relations at the Financial Planning Association, says the FPA supports the Administration's proposal and that the proposal does include a pretty clear exclusion for broker/dealers and investment advisors registered with the SEC. However, the FPA wonders how the CFPA would affect the Financial Planning Coalition's proposal to have a professional oversight body oversee financial planners. He says that right now, members of the Coalition--which includes the FPA, NAPFA, and CFP Board--are talking about the professional oversight body idea with members of Congress. "We're getting some traction" on the idea, he says.
Beefing up the SEC's investor protection role is precisely what the Treasury Department did when it sent the Investor Protection Act to the Hill in early July. Chief among the SEC's new powers would be imposing a fiduciary standard on broker/dealers that provide investment advice. Michael Barr of Treasury said on the conference call with reporters that he anticipates the SEC will require that both advisors and broker/dealers will "have a strong fiduciary duty when providing investment advice." However, he said, "that will take significant rulemaking."
Brian Rubin, a partner with the law firm Sutherland in Washington, D.C., says there's no doubt that FINRA and OCIE will need to hire additional examination staff to handle a fiduciary standard. "I think this new fiduciary standard is going to cause a lot of new issues to pop up that the regulators are going to have to deal with," Rubin says.
The SEC would also be given the authority to examine and ban forms of compensation that are profitable to the broker or advisor, but not in the client's best interest.