More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- 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.
[Editor's Note: Since the April issue of Investment Advisor went to press, Senator Chris Dodd's financial services reform bill has advanced in the Senate. Visit the News section of InvestmentAdvisor.com for the latest developments.]
With Senate Banking Committee Chairman Christopher Dodd's (D-Connecticut) sweeping financial services reform bill released on March 15, the full Senate Banking Committee began marking up the revised "Restoring American Financial Stability Act of 2010" the week of March 22 (the same week the House was determined to pass healthcare reform).
Now the true shape of the financial services reform bill will come into full view, as the Banking Committee parses through the bill's existing amendments and adds new ones.
Despite the fact that Dodd ended bi-partisan talks on his financial services reform bill March 11, he vowed at a press conference on March 15 in which he released his draft legislation that his committee will produce a reform bill this year; Dodd was hoping to finish marking up the bill before Congress broke for Easter recess March 26.
However, Dodd's Republican counterpart on the Banking Committee, Senator Richard Shelby (R-Alabama), said that while he was optimistic that a bipartisan consensus could be reached, he did not think it would be in a single week. In a statement after the bill was unveiled, Shelby said that "Over the coming days, my Republican Banking Committee colleagues and I will give Chairman Dodd's proposal the serious consideration it deserves. Given the magnitude, complexity, and importance of this task, it is critical that we have sufficient time for a thorough review."
How It Looks at Launch
As expected, Dodd's re-crafted bill includes Senator Tim Johnson's (D-South Dakota) amendment requiring the Securities and Exchange Commission (SEC) to first study and then use the findings of the study to create rules regarding the obligations of broker/dealers and investment advisors. Johnson's amendment replaced the original language in Dodd's bill, which would have required brokers to adhere to a fiduciary standard of care. No doubt advisors and others in the investment advisory community will be anxiously waiting to see whether the controversial amendment proposed by Senator Herb Kohl (D-Wisconsin), which requests that the SEC create an independent oversight board to regulate financial planners, is successfully inserted during mark-up. Bob Glovsky, chair of the CFP Board of Standards, said during a conference call with reporters in mid-March that most members of the Senate Banking Committee, including Dodd, support the Kohl amendment.
Knut Rostad, chairman of the Committee for the Fiduciary Standard, which lobbied hard against the Johnson amendment, arguing that it duplicated past efforts by the SEC, says that "all of the other fiduciary measures will not stop" because the Johnson amendment is part of Dodd's bill. "We will continue to see brokers and advisors moving toward the [fiduciary] standard," he says.
Kristina Fausti, director of legal and regulatory affairs for Fiduciary360 (Fi360), and a former SEC staff attorney, agrees that the "SEC is very interested in the fiduciary issue," specifically through measures being pursued by the SEC's Investor Advisory Committee, which was set up last June to give investors a greater voice in the Commission's work.
Don Trone, CEO of Strategic Ethos and former head of Fiduciary 360, agrees that the fiduciary standard will continue to flourish. "The major wirehouses have started fiduciary divisions (top brokers who are permitted to acknowledge fiduciary status) and the national and regional B/Ds continue to expand the use of dual registration," Trone says. Even without enabling legislation, "my sense is that the industry will continue to move prudently in the direction of a fiduciary standard."
But the Financial Services Institute (FSI) is one group that supports the Johnson amendment. David Bellaire, general counsel and director of government affairs for FSI, says that while the Rand study focused on the investors' perceptions and understanding of the differences between brokers and advisors, "it did not study solutions to what it highlighted. That's really what the SEC study would do" under the Johnson amendment.
Straying Far Afield
Dodd's revised reform bill strays significantly from the proposal that he floated last fall, specifically in that it creates a separate Consumer Financial Protection Agency (CFPA) within the Federal Reserve, not a standalone agency as he originally proposed. Dodd's new bill also would create a council of regulators to work with the Federal Reserve Board to oversee systemically risky financial institutions; impose tough new capital and leverage requirements on banks; and would establish an Office of National Insurance, a new office within the Treasury Department to monitor the insurance industry. Dodd's bill would also give the SEC and CFTC the authority to regulate derivatives.
Hedge funds would also have to register with the SEC under Dodd's new bill, and the assets threshold for federal regulation of investment advisors would be raised from $25 million to $100 million, which would increase the number of advisors under state supervision to 28%. Sources also say that Dodd's bill will include a self-funding mechanism for the SEC.
David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, points out that a self-funding mechanism for the SEC along with raising the $25 million level separating SEC-registered advisors with state registered ones are two ways to give the SEC "the resources it needs to do its job." Raising the $25 million level to $100 million "would shift 4,200 SEC-registered investment advisors to state jurisdiction--thus reducing the total number of SEC-registered investment advisors by about 40%," he says.
The Financial Planning Coalition--the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), and the CFP Board--has been the collaborative brainchild behind the idea of creating an entity that would regulate financial planners, and has been lobbying members of Congress for support. The independent oversight board under Kohl's amendment would be housed within the SEC, and it would be up to the SEC to appoint members of the oversight board. CFP Board Chair Glovsky said that the SEC is "aware" of such an oversight board to regulate financial planners but "has some concerns about funding."
Kohl's proposed amendment would expand the definition of financial planner to include investment advisors and brokers and "anybody who holds himself out to the public as a financial planner" and provides advice with respect to the management of financial assets in not fewer than two areas of financial planning.
But Kohl's proposal is running into opposition. Tittsworth of IAA says that his group has "expressed concerns that the financial planning coalition's proposal should not subject investment advisors to additional regulation." Moreover, Tittsworth says the IAA is "not aware of any gaps in the current regulatory framework governing investment advisors, many of whom perform additional services in addition to providing investment advice."
Who's Going to Pay for It?
It's not surprising that the SEC has expressed concerns about funding for an independent oversight board, Fausti says, because establishing such an entity would require "expanding the SEC's authority in an area where it lacks some expertise. The agency would need to add staff that fully understands all of the dimensions of financial planning that go beyond investment advice, and would also be required to stretch its existing resources in order to properly fulfill all of its obligations under Kohl's amendment."
Washington Bureau Chief Melanie Waddell can be reached at email@example.com.