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.
- 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.
Reports of the demise of the Securities and Exchange Commission were premature. In the wake of the Madoff scandal, some questioned whether the SEC would survive, but as the financial services regulatory reform debate has unfolded during the past year, those questions largely have been settled in the agency's favor. With support from Congressional leaders, SEC Chairman Mary Schapiro is implementing initiatives to address shortcomings revealed in the Madoff case. Reading the tea leaves in Washington--where I've spent more than 20 years in government, the private sector, and now with the Investment Adviser Association--I'm willing to bet that the SEC will end up with substantial additional resources.
A big bump in SEC resources will directly affect all investment advisors. For starters, it will mean more comprehensive and more frequent SEC inspections. It also will translate into more regulations. The bottom line is that investment advisors should be prepared to face a heightened regulatory and inspection workload in the days ahead.
One reason cited for additional resources is the growth in the investment advisory profession. In recent years, the number of SEC-regulated investment advisors has grown about 30%, from 8,600 in 2005 to more than 11,000 today. But the agency's budget has not kept pace. As Chairman Schapiro has noted, "beginning in 2005, the SEC faced three consecutive years of flat or declining budgets, the end result being a 10% reduction in its workforce and a cut of more than 50% in its new technology investments." Several years ago, a key ingredient of the SEC inspection program was to inspect all advisors at least once every five years. Today, it would take 10-11 years to inspect all SEC RIAs.
Historically, the SEC has been funded by annual appropriations from Congress. But there are other ways to increase SEC resources. For example, the House bill passed in December includes no fewer than three approaches, any one of which would be consequential.
Authorization Levels Doubled. The House bill would double SEC appropriations over five years: from $1.1 billion in 2010 to $2.25 billion in 2015. If funded, these provisions would increase total resources for the SEC to unprecedented levels.
SEC Registration Increased to $100 Million AUM. In 1996, Congress established $25 million in assets under management as the dividing line between state- and SEC-registered RIAs. To date, the $25 million AUM level has never been increased by the SEC. The House bill would increase the level to $100 million, shifting more than 4,200 investment advisors to the states and dramatically reducing the number of SEC-regulated investment advisors.
Investment Advisor User Fees. As if that were not enough, the House bill also requires the SEC to collect user fees from all SEC-registered investment advisors to recover "the cost of inspections and examinations of registered investment advisers." This provision gives the SEC virtually unlimited authority to collect fees from investment advisors to fund its inspection/examination program.
The bill reported by the Senate Banking Committee takes a somewhat different tack. Like the House bill, it raises the threshold for SEC advisor registration to $100 million. But it also includes a "self-funding" provision that would allow the SEC to keep and use transaction and registration fees it currently collects (instead of ending up in the U.S. Treasury). This would give the SEC more, and more predictable, funding.
Our organization supports the SEC's investor protection mission. We support giving the agency the resources it needs to do its job. We believe a single governmental regulator accountable to Congress and the public is the right framework for the investment advisory profession. How these important questions will be resolved in the coming weeks will be a key element of "regulatory reform" and will directly affect every investment advisory firm.
David Tittsworth is executive director of the Investment Adviser Association in Washington, DC. He can be reached at www.investmentadviser.org.