More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- 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.
By Dale E. Brown
When financial services regulatory reform efforts began in Congress in 2009, it was certain that there would be moments of high drama for investors, broker/dealers, and financial advisors. We have not been disappointed. As is often the case with scenarios full of complexity, seemingly conflicting views and perspectives, and the nuances and gray areas that constitute our real and imperfect world, it was also certain that we would experience a sound-bite approach to the 1,410 pages of legislation that the Senate may pass this week. What we could not foresee, however, was that the most recent sound bite would be "Because of Goldman Sachs." Pair this with the sound bite that had already emerged about what many view as the answer to investor protection - "suitability standard = bad" and "fiduciary standard = good" - and we have a truncated dialogue that does not do justice to investors.
The issue of whether the fiduciary standard is the best standard for all advisors is more intricate than it might seem. As Senator Susan Collins, who drafted an amendment to the Senate bill attempting to impose a fiduciary duty on broker/dealers in the aftermath of the Goldman Sachs hearings, acknowledged, "It's turning out to be far more complicated than it first appeared."
The Financial Services Institute, which represents independent broker/dealers and their affiliated advisors and thus, by extension, the millions of "Main Street" Americans who rely on independent advisors for comprehensive financial services, is committed to enhancing investor protection. Our vision is that all individuals have access to competent and affordable financial advice, products, and services delivered by a growing network of independent financial advisors affiliated with independent financial services firms. Concurrent with this vision is the belief that even the most well-intentioned investor protection "reform" can have unintended consequences that may, in fact, harm investors, limit their access to affordable advice, or restrict their choice of advisor. At times in this debate, FSI has been portrayed as being "anti-fiduciary." We'd like to set the record straight by clearly stating what we are for - and what we hope will be the final result of regulatory reform legislation.
We're for a uniform standard of care defined by the SEC. Investors' understanding of the standard of care owed to them by their chosen financial advisor must be improved. An appropriate standard of care will ensure transparency in these business relationships, effective disclosures to clients, and efficient, low-cost investment solutions and operations, while promoting and enhancing investor protection. Each of the existing standards (suitability and fiduciary) has its shortcomings. The standard of care issue must be addressed carefully and thoughtfully to ensure investors are protected while minimizing unintended consequences. We believe the SEC study required by the Senate bill will provide all stakeholders - investors, the financial services industry, consumer groups, and others with greater familiarity of the needs of the retail market - an opportunity for meaningful input into the creation of a standard that works for "Main Street" investors. The "intended" consequences should include universal access to competent and affordable investment advice, clear and concise client disclosures, and better clarity about the obligations broker/dealers, RIAs and financial advisors owe to consumers under a wide variety of relationships, whether that obligation is represented by a "new" fiduciary standard or enhancements to the existing one.
We're for enhanced supervision and more robust examination and enforcement. A significant regulatory gap exists between the resources dedicated to the examination of broker/dealers and those committed to the examination of registered investment advisers. While this regulatory gap has serious consequences for the industry, the implications for investors are even more troubling. The SEC and FINRA examine more than half of the approximately 4,900 registered broker/dealer firms each year. Every broker/dealer is examined at least once every three years. By contrast, the SEC projects that fewer than 10 percent of the more than 11,000 registered investment adviser firms will be examined during fiscal years 2009 and 2010. These statistics come from a speech given by Richard G. Ketchum, FINRA chairman, before the NAVA (now IRI) Government & Regulatory Affairs Conference on June 8, 2009.
Financial reform legislation seeks to address these concerns by adjusting jurisdictional boundaries and increasing SEC funding. However, improving regulatory examination and enforcement for investment advisers and broker/dealers is more complicated than merely changing the responsible regulator or allocating more money to the problem. Improvement requires careful consideration if we intend to improve investor protection. We believe the most effective way to close the regulatory gap is through the creation of a self-funded industry regulator for investment advisers.
We're for a regulatory system that recognizes that different investors require different levels of service and advice. Efforts to enhance investor protection need to take into consideration the great diversity of business models that deliver products and services to investors. Insurance companies, wirehouses, discount firms, clearing firms, independent broker/dealers, and others make up the marketplace. Some investors make their own investment decisions and want to place orders by the cheapest method possible. Other investors want the help of a trusted advisor whom they are more than willing to pay to make such decisions for them. Quite simply, different investors require different levels of advice and service, and the market has responded to address these needs. These different business models and investor needs are relevant considerations in this important regulatory reform effort.
We're for a collaborative effort that seeks and incorporates the diversity of opinion, experience, and perspective of multiple industry and consumer groups. An SEC-directed study that achieves this goal will go a long way toward closing the current gaps in investor protection.
A complex issue such as a regulatory framework that exists to serve all types of investors deserves more than sound-bite solutions. It deserves the best minds in our industry who can, together, do what 1,410 pages of legislation can't. We're ready to participate.
Dale E. Brown, CAE, is president & CEO of The Financial Services Institute (FSI). The FSI is the advocacy organization for independent broker/dealers and independent financial advisors. For more information, please visit financialservices.org.