More On Legal & Compliancefrom The Advisor's Professional Library
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Whether a fiduciary duty for broker/dealers and all types of financial advisory professionals makes it into the final financial reform legislation (which remains in conference at press time), all advisors can expect heightened scrutiny of their practices by the Securities and Exchange Commission (SEC)--and other regulators including possibly FINRA--going forward.
What's more, the SEC--with or without the powers to create fiduciary standards for all financial services professionals--will move forward with its plans to harmonize the rules for broker/dealers and advisors.
After final enactment of the financial services reform legislation--which is expected by July 4--there will be "a flurry of activity by the Securities and Exchange Commission (SEC) and other regulators," predicted David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, during a Webinar conducted by Investment Advisor in early June. The final legislation will provide the SEC with more resources, Tittsworth says, giving the securities regulator the funds it needs to increase its scrutiny of investment advisory firms, and "that means that [advisors'] compliance and risk management is more important than ever before."
Indeed, Dan Barry, director of government relations for the Financial Planning Association (FPA) agreed during the Webinar that enactment of the financial services reform bill is "the end of the beginning." For advisors, a lot of issues will still be left unresolved, Barry said. For instance, the Financial Industry Regulatory Authority (FINRA) will continue vying for oversight of advisors, and if the final reform legislation includes a fiduciary duty for brokers, finessing such a standard and applying it will take some time.
But as the reconciliation process began in early June among House and Senate conferees, the committee members used the Senate reform bill as the base text for their deliberations. The Senate version includes an SEC study of broker/dealer and advisor obligations and the necessity of a self regulatory organization (SRO) for advisors, whereas the House bill includes a provision that would require brokers to adhere to a fiduciary standard of care.
House Financial Services Chairman Barney Frank (D-Massachusetts) had promised to continue to press during the reconciliation process for the House language calling for a fiduciary standard for brokers, as did his counterpart on the committee, Rep. Paul Kanjorski (D-Pennsylvania), who is also chairman of the House Subcommittee on Capital Markets. As the conferees convened on June 10 to deliver their opening remarks, Kanjorski stated that the final reform package must include "the strongest possible fiduciary standard for every financial intermediary providing personalized advice." He also said that while the SEC's performance under SEC Chairman Mary Schapiro "has improved markedly," Congress "must consider how to fundamentally alter securities regulation by including in the final bill my comprehensive external study to thoroughly examine the deficiencies of our current system and to identify what further reforms it must undergo."
The SEC's Agenda Revealed
The SEC signaled its intentions to move forward with harmonizing broker/dealer and advisor rules when it submitted in April to the Office of Management and Budget (OMB) the securities regulator's regulations under development or in review, also known as the Unified Agenda of Federal Regulatory and Deregulatory Actions. Twice annually, all U.S. government agencies must file information on their rulemaking initiatives. While the passage of financial services reform could derail the SEC's timing on such regulatory initiatives, the SEC nonetheless told the OMB that its Office of Investment Management would issue a rulemaking proposal concerning harmonizing advisor and broker regulations in March 2011. The SEC's agenda also indicates that the same division would seek a rulemaking to update the books and records requirements for investment advisors in February 2011. The Division of Investment Management, according to the SEC's agenda, is considering a rulemaking proposal on Part 1A of Form ADV to be issued in December 2010.
The fiduciary issue aside, both the House and Senate versions of financial services reform include a provision that authorize the SEC to do many things relating to "disclosure, sales practices, conflicts of interest, and compensation schemes under the rubric of harmonization," noted Tittsworth during IA's June Webinar. In his mind, "a lot of the talk [regarding harmonization] boils down to imposing broker/dealer type rules on advisors, not the other way around." Tittsworth alluded to a speech by SEC Chair Schapiro in which she said that "'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.'" The SEC already has the authority--"and will probably have enhanced authority" after the legislation is passed into law, "to do all sorts of things under this harmonization umbrella," Tittsworth said.
The FPA's Barry added that while he's "hopeful" that harmonization by the SEC will not be "just overlaying broker/dealer rules on advisors," the SEC "will get more robust in its rulemaking post [the reform] legislation." The main areas of harmonization, he warned "will be oversight and enforcement, and the enhanced resources the SEC receives will go toward enhanced oversight of advisors."
The Senate bill also includes a study of financial planning by the Government Accountability Office (GAO). After the final reform bill is signed into law, the GAO would have six months to conduct a study to examine the effectiveness of the current state of federal regulation of those who call themselves financial planners, and also explore the benefits to consumers of designating an entity--which could possibly be FINRA--to regulate financial planning.