More On Legal & Compliancefrom The Advisor's Professional Library
- Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
- U.S. Securities and Exchange Commission Information This information sheet contains general information about certain provisions of the Investment Advisers Act of 1940 and selected rules under the Advisers Act. It also provides information about the resources available from the SEC to help advisors understand and comply with these laws and rules.
At the heart of that issue of harmonizing rules for broker/dealers and advisors is a fiduciary duty, and having the same standard of care for broker/dealers and investment advisors, and that requires legislation. So we've been working very hard in the House and the Senate, to mixed results honestly, to try to get that grant of authority to have a fiduciary duty across both categories of financial professionals. So until we have the legislation, it's hard for us to get very much else done. That said, we have other issues that we're moving ahead on: 12b-1 fees, point of sale disclosure, things in and around that space that we think are important. But our attention right now is focused on fighting for the legislative provision that would mandate a uniform fiduciary standard.
So you will continue to fight for a fiduciary duty for both brokers and advisors? Absolutely. We sent a letter on March 9, a very strong letter, to the Senate again pushing the issue and we worked hard on it in the House as well. It's an important issue for us.
As far as the Dodd bill asking for the SEC to study the issue of broker and advisor obligations again, do you think the SEC should be studying this issue again?
We're happy to study whatever Congress would like us to study. The Rand study was done; I think we have a very good handle on the issue. The key thing from our perspective is that if Congress wants us to study the issue again, that's fine. But at the end of that study we need the authority to go ahead and take action. [The legislation] doesn't give us that authority. That's the real flaw from our perspective. There is not a grant of authority when the study is done to go beyond our existing authority in respect to rule writing.
So you'd have to go back to Congress? That's the issue.
That could take a long time. Yes. The bill needs to give us the ability to create the fiduciary standard of conduct for all professionals at the conclusion of the study, and that's the piece that's so critical that's missing.
When will something happen with 12b-1 fees? I'm hoping we're going to go forward this summer. Timing is always hard to predict. But we got a big one out of the way today (April 8) with the new [asset] securitization rules that were proposed. But we have some things in the pipeline that we're finishing up this year. With 12b-1s, we're going to try and address the issues that have been perennially raised about 12b-1 fees. Without getting too specific, I would hope we would go beyond disclosure and clarity, which has always been a complaint about, 'What's a 12b-1 fee'....but also with the level of fees; we want to look closely at that as well.
What's your view on how financial services reform is moving forward now?
There are a lot of great things in these bills--a lot of things that are really important for our financial system and for our economy. For example, bringing over-the-counter derivatives under regulation for the first time is critically important. That's not to say there aren't so gaps that I think still need to be filled and that deserve more attention in the bill. For example, we've got some pretty big end-user exemptions in the House and the Senate bills that would have a lot of swaps not centrally cleared. So I think we have some work to do to narrow some of the gaps and exemptions that exist. I think that the bill creates confusion with respect to securities-based swaps because it doesn't treat all securities-based swaps like securities even though they are an economic substitute for securities. Some of them will be treated as commodities even though they have securities as their reference point. So we think the lines could have been drawn in a way that was more effective than currently.
We've talked about the fiduciary standard part of the bills--on the Senate side we'd like to see that much stronger.
Are you confident you might get somewhere with that? I'm always confident. I know we will push very, very hard on this. We're going to continue to make the case.
Another thing that's great in the bills is the registration of hedge funds and private equity. But again, there are some exemptions for private equity and venture capital that I'm concerned about, because I think it's easy enough to restructure your business to fit under one of those exemptions. So we won't achieve the full benefits of hedge fund registration. So those are specific examples, but I think there's a lot that's good in the bills, but there is work to do and gaps to close and we are committed to working on that.
Are you satisfied with the SEC funding mechanisms provided in the House and Senate bills?
No. The House did not do a self-funding or an independent funding model. They did an authorization, which is great but it doesn't mean appropriators have to follow it. They would double the SEC's appropriation over five years. The Senate bill does have independent funding for the SEC and we're obviously very much supportive of that and would love to see independent funding. This agency has had a feast or famine existence for many years. It's extremely difficult to plan and impossible to ramp up in a face of crisis when you're subject to an annual appropriation and you can't bring on more people when you need them absent going back to Congress. That puts us in a very difficult position and we already return in fees to the government well in excess of our annual appropriation anyway. Except for the CFTC, all of the other financial regulators have independent funding. So when the FDIC needed to bring on 1,000 people last year, they brought on 1,000 people. We can only bring on as many people as we have vacancies, and that means in a market crisis or when markets are growing rapidly as they were over the last few years, there was no flexibility here to grow. It's not the reason for all of our woes, but it's a significant contributor to our inability to keep up with Wall Street.
Do you have confidence that state regulators could examine advisors if the SEC registration level was increased to $100 million from $25 million, as set out in both the House and Senate bills?
Here's my worry about it. That increase to $100 million results in about 40% of investment advisors who are currently subject to SEC registration being state regulated--about 4,000 plus advisors. I worry very much about whether the states have resources, particularly at this time, to take on an additional 4,000 registrants who are very much dealing with the public day in and day out. We haven't had sufficient resources to do the kind of job in this area that I would love for us to do, but I'm not sure we should feel great about pushing this issue to the states if they don't have the resources either to do it. I think it's a difficult issue.
What's the biggest lesson that you think the SEC has learned post the Madoff scandal?
It's hard to pinpoint one post Madoff lesson. If you look at our Web site you'll see the litany of things that we've done to try to respond to the root causes at the agency for failing to shut down Madoff much sooner. I would say they really go to collaboration and communication within the agency. They go to having the right kinds of skill sets and the necessary tools for people to pursue suspicious behavior and suspicious activity. We've been trying to hire people with very different skill sets and we have virtually all new leadership across the agency. People are committed to working in a very collaborative and collegial way, sharing information; we have a lot of cross agency task forces now to try to move things ahead as a way to break down the stove pipes. Again, a problem in the Madoff area was in communication among different parts of the SEC. A problem was whether we had people who could really understand the information that was being presented to them and the red flags that it may have been showing them--hence the new skill sets. We have new rules on investment advisor custody and the requirement for surprise exams if you custody with an affiliated custodian or have power of attorney over a customer's account. Those I think will be very helpful. It's leveraging our scarce resources by using accounting firms to help us police the market. So we've taken the handcuffs off of our enforcement people; we've brought talent into OCIE. It's a combination of things and we've tried to be as expansive as we can in dealing with the tragedy of this failure and learning from it. We talk about it here; we talk about what the lessons learned are; it's one of those things that I think with shape the psyche of the agency for a long time, and I'm not sure it's a bad thing.
In my recent interview with Harry Markopolos, he said that the SEC Commissioners should not be securities lawyers. What do you say to that?
We have very good commissioners and of course those aren't decisions that I get to make, those are for the President. But I would say that I've talked with Harry and I agree that we need to broaden our expertise and skill set. So we've created a new division of Risk, Strategy and Innovation, we have quite different people there. But if you look at our job postings in OCIE and enforcement's specialized units, you will see us looking for, and we are successfully bringing on board, people of quite different backgrounds. So the new head of OCIE in New York comes from a hedge fund. We're finding that this is a good time for us to be hiring, both because it's a good market for us, but also because people are anxious to do something in the public's interest. So I would agree with Harry that bringing in people who think quite differently is very helpful.