More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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.
Following months of wrangling over everything from a fiduciary standard for brokers to systemic regulation, all that's left in financial services reform is the voting and the signing, along with some shouting and finger-pointing. After a marathon final session that began on Thursday, June 24, House and Senate conferees met into the early hours of Friday, June 25, and reconciled by 5:39 AM their differing versions of financial services reform legislation. The voting in both the House and Senate reconciliation committee went along strict party lines, likely presaging the vote on the final legislation in both chambers.
The massive bill now goes to both houses of Congress for expected approval, and then will be sent to the White House for signing by President Barack Obama, who had long set a deadline of July 4 to have reform legislation on his desk. In a recent interview with Investment Advisor's John Sullivan, Pershing CEO Rich Brueckner said that Obama wanted the bill to be passed in time for his participation in the G-20 meeting which begins in Toronto on June 26. Having such visible proof of the U.S.'s backbone in getting strict in reforming financial services would allow Obama to talk tough on reform at the G-20 meeting, Brueckner suggested.
The Associated Press reported on June 25 that Obama told reporters he was gratified by Congress's work, which included 90% of what he wanted. "We've all seen what happens when there is inadequate oversight and insufficient transparency on Wall Street." He said the provisions in the bill "will hold Wall Street accountable so we can help prevent another financial crisis like the one we're still recovering from."
What's in the Bill?
The reconciled bill includes a provision under which the SEC will have six months to conduct a study of advisor and broker obligations toward retail customers. Once the study is complete, the bill gives the SEC the rulemaking authority to put brokers under the same fiduciary standard of care that applies to investment advisors.
But there is much more in the bill that will affect advisors and how they invest on behalf of their clients besides the fiduciary issue. The bill:
- l Establishes the Consumer Financial Protection Bureau (CFPB), which consolidates consumer protection duties now housed at a number of federal agencies in an independent agency housed at the Federal Reserve. The Bureau will be led by a director appointed by the President, with a dedicated budget, and not only can write rules but will examine and enforce those rules for banks and credit unions with more than $10 billion in assets.
- l Establishes the Financial Stability Oversight Council (FSOC), a systemic risk regulator chaired by the Treasury Secretary and comprising 10 federal financial regulators (including the Fed, the SEC, and the CFPB), an independent member, and five nonvoting members, the Financial Stability Oversight Council will be charged with identifying and responding to emerging risks throughout the financial system. The nonvoting members include will include federal and state banking, insurance, and securities regulators.
- l The FSOC's mandate includes establishment a version of the Volcker Rule that would prohibit banks from proprietary trading, investment in, and sponsorship of hedge funds and private equity funds, and would limit banks' relationships with hedge funds and private equity funds. Nonbank financial institutions supervised by the Fed would have similar restrictions on proprietary trading and hedge fund and private equity investments.
- l The FSOC will also make recommendations to the Federal Reserve for rules on capital, leverage, liquidity, risk management, and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.
- l Creates a new Office of Financial Research within the Treasury Department to support the FSOC's work by collecting financial data and conducting economic analysis.
- l Gives the SEC and the Commodity Futures Trading Commission (CFTC) the authority to regulate over-the-counter derivatives, requires central clearing and exchange trading for derivatives, and requires the SEC and the CFTC to pre-approve contracts before clearing houses can clear them.
- l Establishes an Office of Minority and Women Inclusion at federal banking and securities regulatory agencies intended address employment and contracting diversity matters at those agencies.
- l Requires hedge funds and private equity advisors to register with the SEC as investment advisers and provide information about their trades and portfolios necessary to assess systemic risk. This data will be shared with the systemic risk regulator.
- l Raises the assets threshold for SEC regulation of RIAs from $30 million to $100 million; those under $100 million in AUM would be regulated by the states.
- l Creates an Office of Credit Ratings at the SEC that will have its own compliance staff and the authority to fine agencies. The SEC will also be required to examine Nationally Recognized Statistical Ratings Organizations (NRSROs) at least once a year and make public the key findings of those examinations.
- l Abolishes the Office of Thrift Supervision, transferring its authority to regulated savings banks to the Office of the Comptroller of the Currency.
- l Creates a Federal Insurance Office in the Treasury Department, with responsibility for gathering information about the insurance industry, and monitoring the industry for systemic risk purposes.
- l Calls for a comprehensive outside consultant study of the SEC, an annual assessment of the SEC's internal supervisory controls, and a General Accountability Office (GAO) review of SEC management.
- l Creates an Investment Advisory Committee of investors to advise the SEC on its regulatory priorities and practices; an Office of Investor Advocate in the SEC, to identify problem areas for investors dealing with the SEC and provide assistance to those investors; and an ombudsman to handle investor complaints.
Read Investment Advisor Washington Bureau Chief Melanie Waddell's report from late on June 24 on what the SEC study provision means for proponents, and detractors, of a fiduciary standard for all.
In a posting on June 24, Wealth Manager blogger Knut Rostad ruminated on that provision's seeming victory for those who want all advice-givers to operate under the same fiduciary standard.
Rep. Barney Frank's House Financial Services Committee released a long summary of the key provisions in the bill.