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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The fiduciary battle is kicking into high gear. Advisor trade groups as well as state securities regulators and investors rang in the New Year by shooting off a joint letter to Senator Christopher Dodd (D-Connecticut), chairman of the Senate Banking, Housing, and Urban Affairs Committee, and ranking member Richard Shelby (R-Alabama), urging them to keep intact Section 913 of their financial services reform bill, which would require all advice givers to adhere to a fiduciary standard of care.
If you recall, back in early December, groups like The American College were urging Dodd and his committee to do the exact opposite and eliminate Section 913 because it would impose an unfair "one-size-fits-all" fiduciary standard.
Dodd, who announced in early January that he would not seek re-election, was scheduled to hold a hearing on January 26 to continue marking up his financial services reform bill, the Restoring American Financial Stability Act of 2009, and is expected to have a bill approved by mid February.
Meanwhile, Back at the Healthcare Ranch
As for healthcare reform, at press time Democrats in Congress were preparing to merge the two healthcare bills passed in 2009 by the Senate and House into a single bill. Both chambers of Congress would have to pass the compromise bill before President Obama could sign it into law. The Obama Administration was hopeful that the President could announce that he had signed the historic healthcare bill into law during his State of the Union Address, which according to White House spokesman Robert Gibbs would take place after February 2.
The groups signing on to the January 7 letter to Dodd were the Consumer Federation of America (CFA), the North American Securities Administrators Association (NASAA), Fund Democracy, the Investment Adviser Association (IAA), the Certified Financial Planner Board of Standards, Inc., the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA).
The groups told Dodd and Shelby that Section 913 of the financial services reform bill accomplishes the goal of providing benefits to investors by imposing a fiduciary duty on all providers of investment advice "in a straightforward and sensible fashion by eliminating the broker/dealer exclusion from the (Investment Advisers) Act." The broker/dealer exemption allows brokers to avoid registering as advisors if the advice they provide to clients is "solely incidental" to selling securities.
"For too long, brokers have been free to market themselves as trusted advisers and offer extensive advisory services without having to meet the fiduciary standard appropriate to that role," the letter to Dodd and Shelby from the organizations said. The draft bill "eliminates the legislative loophole that has allowed this dual standard to persist." Investors will only benefit from the fiduciary provision of the Senate draft bill "if Congress resists efforts to scale back and water down critical protections provided by the legislation, efforts that have been advanced through a campaign of misinformation and mischaracterization," the groups said.
Competing Interest Groups
The January 7 letter also presented Dodd with a "myths/facts" sheet rebutting arguments and what they say is "misinformation" regarding the Senate reform bill's fiduciary requirement for investment advice. For instance, in a November 20 letter to Dodd, the Association of Advanced Life Underwriting (AALU), the National Association of Insurance and Financial Advisors (NAIFA), and the National Association of Independent Life Brokerage Agencies (NAILBA), argue that Section 913 of the bill would be "enormously costly and counterproductive," and "is a radical departure from current law."
It would lead, the insurance groups went on to say, to "reduced customer access and service, reduced financial protection for Americans, and loss of capital formation and jobs." Section 913 "would force life insurance agents who already are qualified as registered representatives and supervised by the SEC and FINRA to register as investment advisers--and thereby take on more responsibilities, more expenses, and more liability."
Section 913, if enacted, the groups continued, "would force thousands of our members to limit the product choices available to their customers, the majority of whom are middle-market consumers who look to us for insurance and retirement products."
But the CFA, IAA, Fund Democracy, FPA, NAPFA, and others writing the January 7 myths/facts sheet (available here) state that it is indeed a myth that Section 913 imposes a one-size-fits-all regulation on all financial services professionals, denying investors access to valued products and services.
The "fact," the groups say, is that Section 913 of the bill "does one thing, and one thing only: it requires broker/dealers and broker/dealer sales representatives who act as investment advisers (providing advice about securities for compensation) to be regulated as investment advisers, closing a regulatory loophole that has led to substantial investor confusion and abuse. The legislation leaves financial services providers free to offer services that do not constitute investment advice without triggering regulation under the Advisers Act."
Another myth, these groups say, is that Section 913 applies "to either insurance sales or advice about insurance, even for individuals who also offer investment advice and would be regulated as advisers under Section 913 with regard to that advice." It also "does not apply to the many activities engaged in by full-service brokers that do not entail advice about securities for compensation (e.g., executing trades, underwriting securities, making markets)."
The Levitt-Donaldson Group
The Investors' Working Group (IWG)--co-sponsored by the Council of Institutional Investors and the CFA Institute Centre for Financial Market Integrity, and co-chaired by former SEC chairmen Arthur Levitt and William Donaldson--recently offered recommendations to both the House and Senate on what a final financial services reform bill should look like. For instance, IWG said that a final bill should include the provision offered in the House's Wall Street Reform and Consumer Protection Act of 2009, which provides the SEC with an increased budget, as well as the provision in the Senate's discussion draft providing the SEC with a self-funding mechanism.
The IWG believes "that SEC should have both more stable long-term funding and a self-funding mechanism that maintains sufficient resources and enhances independence," the group said. "The SEC's funding has simply not kept pace with the explosive growth of the securities markets over the past two decades," IWG continued. "Today, the agency monitors 30,000 entities, including more than 11,000 investment advisors, up 32% in only the last four years. Even so, from 2005 to 2007, the SEC's budgets were flat or declining. On occasion, the Commission has shown reluctance to exercise its authority in certain areas out of fear of political budget retaliation." It is no coincidence, therefore, the IWG says, "That these pockets of poor oversight proved to be sources of great risk. Sufficient, stable, long-term funding that is removed from the Congressional appropriations process is critical to strengthening the independence and effectiveness of the SEC and would address one of the major contributing factors to the financial crisis."
Speaking of the financial crisis, the Financial Crisis Inquiry Commission (FCIC) held its first public hearing on January 13 and 14 and heard testimony from the leaders of the biggest Wall Street banks on the root causes of the global financial crisis. FCIC's mandate--set out by the Fraud Enforcement and Recovery Act of 2009--is to examine the causes, domestic and global, of the current financial and economic turmoil in the United States.
Washington Bureau Chief Melanie Waddell can be reached at email@example.com.