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.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
As we enter the final month of 2009, the financial services industry anticipates some type of reform from Washington by year-end, but the consensus is that there won't be action until 2010 on the overhaul legislation introduced November 10 by Senator Christopher Dodd (D-Connecticut), chairman of the Senate Banking, Housing, and Urban Affairs Committee. That bill was scheduled for markup the week of November 16, but there is little Republican support.
The Dodd legislation would create a single bank regulator called the Financial Institutions Regulatory Authority (FIRA), combining the functions of the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), the state bank supervisory functions of the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve, and the bank holding company supervision authority from the Federal Reserve.
Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, wants to merge the OCC and the OTS, and allow the Federal Reserve and FDIC to retain their supervisory powers. The Obama Administration has the same desire. Frank has been quoted as saying that "there's no remote chance" that Dodd's single bank-regulator concept will see the light of day. Frank's financial services reform plans would create a Financial Services Council to advise the Fed--which would be made up of officials from the Securities and Exchange Commission, FDIC, OCC, and the Credit Union National Association (CUNA).
The Effect on Advisors
David Tittsworth, executive director of the Investment Adviser Association, notes some areas in Dodd's proposal that would affect advisors. The bill would increase the $25 million in AUM threshold separating SEC-and state-registered investment advisors to $100 million. "This would shift about 4,200 SEC-registered investment advisors to state regulation," Tittsworth says. Dodd's plan would also remove the broker/dealer exclusion from the Investment Advisers Act and thus would subject any broker/dealer that meets the definition of 'investment adviser' to the Investment Advisers Act, including fiduciary duty obligations, he says. The plan would also build a self-funding mechanism for the SEC.
Another bill of particular interest to advisors is the Investor Protection Act (H.R. 3817), which the House Financial Services Committee approved November 4 by a vote of 41 to 28. The bill now goes to the full House floor, but Frank said November 3 that the full House will likely not begin debating financial services reform until the first week of December.
During markup of the Investor Protection Act October 28, several amendments were approved by voice vote, and were included in the bill that now goes to the full House.
The Financial Planning Coalition is vehemently opposing an amendment by Rep. Spencer Bachus (R-Alabama), the ranking Republican on the committee, that would extend the regulatory authority of the Financial Industry Regulatory Authority (FINRA) to cover investment advisors who are associated with broker/dealers under FINRA's authority.
The Coalition, which consists of the CFP Board, the Financial Planning Association, and the National Association of Personal Financial Advisors, sent a letter to Frank's office November 2 imploring the Congressman to "conduct a more thorough examination before allowing the delegation of substantial authority from the Securities and Exchange Commission to a self regulatory organization" like FINRA.
The Coalition points out in the letter that Rep. Bachus's amendment "extends FINRA's authority to approximately 88% of investment advisor representatives and implicates application of the fiduciary duty to investment advice."
The expansion of FINRA's authority under Bachus's amendment to the Investor Protection Act, the Coalition goes on to say, "Is without precedent, and the impact of this new oversight structure is significant. For the first time, FINRA would be granted authority to regulate people and practices outside the scope of the Securities Exchange Act of 1934. The members and stakeholders of our respective organizations are very concerned about how this new oversight structure will affect their businesses, their clients, and the very nature of the industry."
An amendment from Rep. Dan Maffei (D-New York) to clarify "how insurance will be treated as to a fiduciary duty," clarifies that broker/dealers and their reps offering a limited basket of products will not violate the fiduciary standard for that reason. "My language clarifies that [B/Ds and their reps] would not have to be knowledgeable of all products in the universe," Maffei said.
Another amendment to the Investor Protection Act was approved that would require the SEC to create a registration requirement for municipal securities advisors and that these advisors would also be held to a fiduciary standard of care.
Yet another amendment on fiduciary duty as it applies to broker/dealers would make the fiduciary standard transaction oriented as opposed to one on an ongoing relationship, meaning B/Ds would only be held to a fiduciary standard at the time of the transaction. "My main concern is whether or not on a self-directed account there will be a perpetual fiduciary relationship," said Rep. Jeb Hensarling (R-Texas) in introducing the amendment. Rep. Paul Kanjorski (D-Pennsylvania) said he opposed the amendment because it goes against the essence of "encouraging relationships as opposed to just a single transaction between parties."
Financial Services Committee Chairman Frank said the language concerning the matter needs work, noting that the manager's amendment to the Investor Protection Act will be subject to further change concerning this matter once it hits the House floor.
Other amendments to the Investor Protection Act that were approved called for various studies to be performed by the SEC. For instance, one amendment introduced by Rep. Carolyn McCarthy (D-New York) asked that the SEC review and analyze the need for enhanced examination and enforcement resources for investment advisors. The study should examine the number and frequency of examinations of investment advisors by the Commission over the five years preceding the date of the enactment of the Investor Protection Act, as well as the need for the SEC to designate one or more self-regulatory organizations to augment the Commission's efforts in overseeing advisors.
The SEC was also asked to study high frequency trading to determine whether it's a systemic risk and unfair to the average investor. Plus, the SEC would be required to study the troubling "revolving door" at the agency, that is, the fact that SEC employees leave the agency and get high-paying jobs on Wall Street.
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.