More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The U.S. House and Senate will begin to reconcile their separate versions of financial services reform legislation starting Monday, June 7, with the conference committee process. The goal is to have a final bill for President Obama's signature by July 4. While reform has focused on regulation of derivatives, consumer protection, systemic risk, credit ratings agencies, and regulation of private fund managers, critical issues still remain unresolved that will ultimately affect advisors and their practices.
On June 4, Investment Advisor's Washington bureau chief, Melanie Waddell, hosted "Financial Services Reform: The Next Steps," a Webinar featuring panelists David Tittsworth, executive director of the Investment Adviser Association (IAA), and Dan Barry, director of government relations for the Financial Planning Association (FPA). They discussed harmonization of investment advisor and broker/dealer regulation--including fiduciary obligations--SEC resources, and the Financial Industry Regulatory Authority (FINRA) as a potential self-regulatory organization.
The hour-long Webinar began with an overview of the House's passage of the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) on Dec. 3, 2009, and the Senate's passage of the Restoring American Financial Stability Act (S. 3217) on May 20, 2010. The questions and answers below are taken from a portion of the Webinar. To hear the full Webinar, click on the link at the bottom of this article.
Melanie: David, I'll start with you. Talk us through the House bill that passed last December and the Senate's passage of its legislation in May. Give us some background on how we got here.
David: Last year, I had the new experience of testifying before both the Senate Banking Committee in March and the House Financial Services Committee in October. Last summer, the Obama administration and Treasury Department released a white paper on regulatory reform and started draft pieces of legislation to Capitol Hill.
When the House actually passed this 1,700-page bill called the Wall Street Reform and Consumer Protection Act of 2009, there were no Republicans who supported it. It was a fairly close vote, when you consider there was a 50-vote margin in favor on the House Democrats' side. The Senate then started taking up its version with a party-line vote in the Banking Committee in March. And very recently, the full Senate voted to approve its counterpart to the House bill, another massive 1,500- or 1,600-page bill, and only four Republicans voted for that final bill and a couple Democrats who didn't think it went far enough voted against it.
Now where we're at is Legislation 101: a House bill and a Senate bill, and both houses of Congress have to pass exactly the same bill before it can go to the President and be either signed or vetoed. The process that is going to begin very soon--in fact, next week--is that there will be a conference committee where both the House and the Senate will appoint a subgroup of members from the committees of jurisdiction, and those two groups have promised to have some public meetings, and Barney Frank will be the chairman of the committee on the House side. That process will start next week, and according to Chairman Frank, they think that they will have the final legislation passed through the House and the Senate and ready for the President's signature by the Fourth of July.
Melanie: The House bill includes a provision calling for a fiduciary standard for brokers, but the Senate bill does not. It instead calls for an SEC study of advisor and broker obligations. What's the likelihood that the final bill will include a fiduciary standard for brokers? Explain what would happen if the House provision requiring fiduciary rulemaking was adopted into the final legislation.
David: To avoid your question, I'll let Dan make that prediction, and I think he's going to go into some detail about what both the House and Senate bills do about fiduciary duties. But if I can recap the question slightly, I'll talk about this word "harmonization," which is a very important concept. While fiduciary duty has been getting the bulk of the attention in the media and on Capitol Hill, harmonization is something that all investment advisors and broker/dealers should be aware of. In March 2008, President George W. Bush and Treasury Secretary Hank Paulson issued a blueprint for a modernized financial regulatory structure. They recommended harmonizing broker/dealer and investment advisor rules and regulations, and for me, the question goes beyond fiduciary duty.
What is harmonization? We have some hints of what that could be from current SEC Chairman Mary Schapiro, who has talked about how securities professionals, no matter what their business card says, should have the same licensing and qualification requirements, the same disclosure obligations, the same regulatory record-keeping standards, and a robust examination and oversight schedule. And the head of FINRA, Richard Ketchum, says the same thing. It's important to remember that whatever happens on fiduciary duty, there are provisions in these bills that could authorize the SEC to do a lot of things relating to disclosure, sales practices, conflicts of interest, and compensation schemes under the rubric of harmonization.
Melanie: Dan, can you take over here and discuss the House bill and focus on fiduciary duty for brokers and related provisions.
Dan: If you saw how I performed in my NCAA basketball pool, you wouldn't ask me to prognosticate. But suffice it to say that the fiduciary issue is in play with the study on the Senate side and the rulemaking provision on the House side. It's still very much up in the air on how it will break out with the final bill and which version they will go with. I expect that you might see a lot of interest group pressure on both sides. Touching on what's in the House bill on fiduciary duty, it's a clear direction from Congress to the SEC that they shall do rulemaking to get brokers when they're giving investment advice to retail customers to abide by a standard--and they don't use the word "fiduciary"--but to abide by a standard that's at least as high as the standard that's applied to advisors when offering personalized investment advice. It's got to be at least as strong as the Investment Advisors Act of 1940 standards.
The archived presentation of Investment Advisor's June 3, 2010, Webinar, with an accompanying PowerPoint presentation, is now available.