More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Two of the Obama Administration's top priorities to accomplish by year-end--healthcare and financial services reform--are well on their way to fruition.
The Senate Finance Committee passed October 13 its version of healthcare reform, and at press time White House and Congressional leaders were busy trying to meld provisions of five House and Senate healthcare bills. The major tussle now in the healthcare debate will be whether to include a public option in the final piece of legislation. The Senate Health, Education, and Labor Committee's (HELP) Affordable Health Choices Act, which was passed in July, as well as the three House healthcare bills, include the public option that the Administration has been championing. But the bill passed by the Senate Finance Committee does not include a public option. The Senate Finance bill--which the Congressional Budget Office (CBO) estimates would cost $829 billion over 10 years--was backed by one Republican Senator, Olympia Snowe of Maine.
Meanwhile, Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, launched full force into financial services reform measures in October, passing on October 14 legislation to strengthen over-the-counter derivatives. The legislation would, for the first time, impose new capital, margin, transparency, record-keeping, and reporting regulations on derivatives. At press time on October 15, Frank and his committee were marking up legislation that would create the Consumer Financial Protection Agency (CFPA). Frank said during the CFPA mark up session that his committee would begin marking up the week of October 18, the Investor Protection Act, "dealing with restrictions on investment advisors."
The Investor Protection Act was discussed by the Committee during a hearing on October 6 to discuss three legislative discussion drafts put forth by Rep. Paul Kanjorski (D-Pennsylvania) on investor protection, registration of advisors to private funds, and creating a national office of insurance.
Kanjorski, ranking member on the Committee and chairman of the committee's subcommittee on capital markets, said during his opening statement that his three bills "work to reverse" the trend of excessive deregulation that has existed and caused the financial crisis "by closing loopholes and fixing problems in our broken regulatory structure, especially in our securities and insurance markets." As Congress works through these drafts and other pieces of financial services reform, Kanjorski said, "We should listen to common-sense ideas and seek out consensus where it exists. I am therefore open to making changes to these draft bills." However, he said, "We must ensure that special interests do not weaken particular solutions to the point of becoming toothless."
The first draft bill, the Investor Protection Act, expands the SEC's powers and requires broker/dealers to adhere to the same fiduciary standard of care as advisors; expands the SEC's ability to reward whistleblowers whose tips lead to successful enforcement actions; allows the Commission to adopt rules to bar the inclusion of mandatory arbitration clauses in securities contracts; expands upon the proposals put forth by the Administration by closing loopholes identified by the Madoff and Stanford Financial frauds; and doubles the Commission's funding over the next five years.
Kanjorski said that because providing the SEC with more "firepower" and more money are "simply not enough," the draft bill calls for an independent, comprehensive study of the SEC and other regulatory bodies that oversee the securities industry by a "high-caliber body" that can recommend further improvements to the SEC and other regulators.
While all those testifying before the Committee agreed that the SEC needs more funding and that broker/dealers that are giving investment advice should be held to the same fiduciary standard of care as advisors (and that fiduciary is indeed a higher standard than suitability), David Tittsworth, executive director of the Investment Adviser Association (IAA) told members of the committee that "not all broker/dealer activities are [about giving] advice" and therefore the same fiduciary standard should not apply when a B/D is performing other activities.
Tittsworth also said IAA worries that the Investor Protection Act "could impose a fiduciary duty only with respect to retail clients and would water down or eliminate the fiduciary obligations that advisers owe all of their clients--whether individual or institutional." Rep. Barney Frank assured Tittsworth that the Investor Protection Act does "apply to non retail services."
Tittsworth and Denise Voigt Crawford, Texas Securities Commissioner and president of the North American Securities Administrators Association (NASAA), told members of the Committee that a remedy to the infrequency of SEC exams is to raise the $25 million threshold that separates federally-registered and state-registered advisors to $100 million. "NASAA members are fully prepared and equipped to fill this [oversight] gap by accepting responsibility for the oversight of investment advisers up to $100 million in assets under management," Crawford told the Committee. By raising the threshold, he said, the "SEC will be left with the giant money managers and the states will take on the smaller shops and it won't cost the federal government more money."
Richard Ketchum, chairman and CEO of FINRA, however, reiterated his dwesire to have FINRA take on oversight of advisors, much like an SRO. "Any such independent regulatory organization for investment advisers should structure oversight programs that are tailored to fit the services investment advisers provide and their role in the market. This type of structure has worked well in the broker/dealer channel, with FINRA working alongside, and overseen by, the SEC," Ketchum said. "Consider the following: There are nearly 5,000 broker/dealer firms registered with the SEC, and between the SEC and FINRA, approximately 55% of those firms are examined on an annual basis. By contrast, there are over 11,000 investment adviser firms registered with the SEC, and the agency expects only 9% to be examined in fiscal years 2009 and 2010."