More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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.
While SEC Chairman Mary Schapiro has been "pursuing an aggressive and investor-focused reform agenda...unlike in some past eras, investment advisor issues have been, and likely will remain, at the forefront," said Andrew "Buddy" Donohue, director of the SEC's Division of Investment Management, at the Investment Adviser Association's (IAA) annual compliance conference in Arlington, Virginia, February 25.
One of those issues that the SEC has been grappling with is harmonizing the rules for broker/dealers and investment advisors, which includes the question of whether to hold brokers to a fiduciary standard of care. It looks as though the SEC will be studying this issue again. Washington sources have confirmed that Senator Christopher Dodd's (D-Connecticut) draft of his financial services reform bill, due out early next week, incorporates Senator Tim Johnson's (D-South Dakota) amendment which asks that the SEC "study" the obligations of advisors and brokers and replaces Dodd's original language requiring brokers to adhere to fiduciary standards.
Indeed, two top officials at the SEC shared their views at the IAA conference on how the fiduciary issue should be handled. Elisse Walter, an SEC commissioner, stated during her comments that while she's "pleased" to see that Congress is addressing the "regulatory inconsistency" that exists between investment advisors and brokers, she "would prefer to see a legislative approach harmonizing the regimes on a more comprehensive scale and taking into account the strengths and weaknesses of both." Walter went on to say that while she believes "strongly that this duty, with its underlying concepts of loyalty and care, is critical to comprehensive investor protection," the SEC has been "too hard" on itself in trying to apply a fiduciary standard to broker/dealers. She suggested that in harmonizing the rules for broker/dealers and advisors, that both advisors and B/Ds instead take an oath that they "always act in good faith, and in the best interest of my client, and will act as a fiduciary." Donohue said that since Chairman Schapiro has recognized that the "nature of the services that broker/dealers and investment advisors provide often are identical from the investor's perspective. In my view, it would therefore seem reasonable for retail investors to expect that all securities professionals providing them with advice should be subject to the same obligations, regardless of how we categorize them."
David Tittsworth, executive director of the IAA, said at the event that he believes "harmonization is code for imposing B/D rules on advisors, not the other way around." Tittsworth added that there is, indeed, a "possibility of FINRA becoming the SRO [self regulatory organization] for advisors." Despite the fact that the provision that would have given FINRA the authority to inspect and regulate any investment advisor associated with a broker/dealer was successfully deleted from the Wall Street Reform and Consumer Protection Act (H.R. 4173) last December, Tittsworth noted that FINRA is still lobbying hard to be the SRO for advisors.
As for other issues affecting advisors, during his speech Donohue pointed to three important rules that his division has been working on over the past year--the SEC's custody rule, pay-to-play rule, and further amendments to Form ADV Part II. The custody rule, which was adopted by the Commission on December 16, 2009, and becomes effective on March 12, requires advisors who have custody of clients' assets to have an annual surprise audit by outside examiners. With the effective date only a couple weeks away, attendees and panelists discussing the custody rule at the IAA event still had a bunch of unanswered questions. Donohue noted that advisors who are deemed to have custody "have until the end of the year to get the first surprise exam."
The SEC voted last July to curtail "pay-to-play" practices used by investment advisors that seek to manage money for state and local governments' pension plans. The proposed rule is designed to prevent an advisor from making political contributions or hidden payments to influence their selection by government officials. The public programs that fall under the proposal include public pension plans that pay retirement benefits to government employees, 457 retirement plans for teachers, and 529 plans. Donohue noted that advisors who are involved in pay-to-play practices violate their fiduciary duties. He said the SEC has received 250 comment letters regarding the proposed rule, and that SEC staff is now working through those comments and is preparing a final rule.
As for Form ADV Part II, Donohue said there will be adoption of further amendments to Part II in 2010.