More On Legal & Compliancefrom The Advisor's Professional Library
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
Congress made a mad dash at year-end 2009 to achieve two of its top goals: passing healthcare and financial services reform legislation. As we enter 2010, on healthcare we have at hand the Affordable Health Care for America Act (H.R. 3962), which the House passed November 8, and the Patient Protection and Affordable Care Act, which at press time the Senate was still debating but was expected to have approved by December 23.
The full House also approved December 11 by a vote of 223 to 202 its sweeping financial services reform bill, the Wall Street Reform and Consumer Protection Act (H.R. 4173). Senator Christopher Dodd (D-Connecticut), who's also been embroiled in healthcare reform, has moved slower in securing passage in the Senate of his financial services reform bill, the Restoring American Financial Stability Act, with Washington insiders projecting that passage of the bill won't come until early this year.
Dodd and his committee began marking up the Restoring American Financial Stability Act on November 19, but Dodd halted work on the bill after opposition from ranking minority member Richard Shelby (R-Alabama). Dodd has now asked key members of his committee to break off into bipartisan working groups to break the logjam on the financial reform legislation. Dodd has paired up with Shelby to tackle two of the most controversial elements of the bill's discussion draft--prudential regulation of banks and consumer protection. The final form of Dodd's reform bill is "still undetermined," since Dodd has farmed out pieces of the bill to those groups of senators to revise, notes Mary Jane Wilson-Bilik, a partner at the law firm of Sutherland in Washington.
While passage of a final healthcare reform bill looks "increasingly unlikely" in 2009, "it is likely the Senate will pass its own healthcare reform bill by the end" of 2009, said John Savercool, UBS Wealth Management's chief lobbyist in Washington, in UBS Wealth Management Research's 2010 Outlook in mid-December. "This will set up a process for House and Senate leaders to reconcile their separate bills, vote on that final version, and send the legislation to President Obama for his signature early next year." Democrats have been very anxious to complete action on healthcare, Savercool says, "so they can move on to addressing legislation about [creating] jobs and [reducing] high unemployment rate, which public polls suggest are the most important priorities for voters at this time."
The House financial services reform bill includes reforms such as creating the Consumer Financial Protection Agency (CFPA) and Federal Insurance Office, granting broad new government powers over large financial institutions that pose a systemic risk, tighter controls of the capital markets, as well as derivatives reform, mortgage reform, and new oversight of credit ratings agencies. Savercool predicts that Congress will pass "comprehensive financial services regulatory reform legislation" by the end of the first quarter. But it is the creation of the CFPA that "will continue to generate the most debate and face fierce resistance in the Senate."
The provision within the House reform bill that would have given FINRA the authority to inspect and regulate any investment advisor associated with a broker/dealer was successfully deleted from the huge financial services reform bill in the early morning of December 11.
Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, along with Rep. Steve Cohen (D-Tennessee) asked that the FINRA amendment--which was originally proposed by Rep. Spencer Bachus (R-Alabama)--be deleted. Bachus said during the House floor debate that he proposed the amendment in response to the Bernie Madoff Ponzi scheme, saying it was necessary because the SEC failed to properly examine Madoff's firm. Bachus eventually said, however, that he would agree to strike the FINRA provision from the financial services bill and explore other remedies. Frank responded that he agreed with Bachus's concerns, but was swayed by concerns expressed by the Texas Securities Administrator that the provision would delegate too much authority to FINRA.
Frank did acknowledge, however, that "there is a role for FINRA" and said Congress will continue to monitor the SEC and hold oversight hearings next year to determine "how best the SEC can [use] the resources of FINRA."
David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, says that while he's "pleased that the amendment passed without any opposition, the big question now is whether the Senate can get a bill passed. We're going to be dealing with this [FINRA issue] well into 2010."
Washington Bureau Chief Melanie Waddell can be reached at email@example.com.