More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Denise Voigt Crawford, Texas Securities Commissioner and president of NASAA, told Investment Advisor in a July 14 interview that NASAA was informed "late last week" that the SEC's Division of Investment Management would recommend to the Commission that there be a separate Form ADV Part 2 for SEC-registered advisors. "This is totally contrary to what we [state regulators and the SEC] had agreed upon," Crawford told IA. "It will be very difficult for people in the industry to juggle two Form ADVs." It's unclear whether the "SEC Commissioners realize that this change has been made," Crawford adds. "If this was a situation where there was a miscommunication at the Commission, we want that to be remedied."
In a July 13 letter to SEC Chairman Mary Schapiro, Crawford writes that having a separate Form ADV Part 2 for SEC-registered advisors "will adversely impact investors and investment advisers, and undermines regulatory cooperation." For these reasons, she continued, "we ask that the SEC reject this recommendation and instruct the staff to move forward with the Form ADV Part 2 as a joint form for use by state- and federal- regulated advisers as proposed by the Commission in 2000 and reproposed in 2008."
Crawford also points out the fact that under the Dodd-Frank regulatory reform bill, which is expected to be passed by the Senate on Thursday, July 15, advisors with up to $100 million in assets under management (AUM) would shift from SEC to state regulation.
"The switching of regulators by advisers happens on a frequent basis with little inconvenience for advisers. This is true for advisers moving to the states from the SEC or the SEC from the states," Crawford told Schapiro. "They simply make changes online to their existing registration forms and then submit their materials to the appropriate regulator. Introducing a SEC-only Part 2 into the process will inhibit advisers in their efforts to comply with the requirements imposed by their regulator."
The debate over how to modify Form ADV Part 2 has been a long one. Form ADV Part 2 discloses information to investors about an advisor's services, fees, and investment strategy. David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, says "disclosure of material facts, including compensation and potential conflicts of interest, is a key component of an investment adviser's fiduciary duty. While we have voiced concerns about aspects of the Form ADV Part 2 proposals, no other organization has done more in urging the SEC to move forward to adopt revisions that will make Part 2 a better disclosure document." That said, he continues, "We hope the SEC and the states will find a way to find common ground on a joint form. Ultimately, our overriding goal on behalf of SEC-registered advisers is to have a single, uniform disclosure document that is not subject to inconsistent or varying requirements."
Crawford details in her letter to Schapiro that prior to the SEC publishing for comment the proposed changes to Part 2 in 2008, "representatives from NASAA met with staff of the Division of Investment Management and SEC Commissioners to discuss various issues concerning the proposed changes to Part 2. As a result of those meetings, it was our clear understanding that the proposed changes to Part 2 would not include a proposal to adopt it as a form to be used by SEC-only registered investment advisers. In fact, the character and tone of these meetings were such that NASAA was led to believe that the joint nature of Part 2 as a single form for use by state- or SEC-registered advisers would not change and, in fact, when the Commission voted to issue the proposed changes, it did so as a joint form.
"Regardless of the fact that NASAA was advised by Commission staff that Part 2 would be proposed as a single form and in fact was proposed as such in both 2000 and 2008, we do not understand what has necessitated the decision to pursue the adoption of a bifurcated Part 2." Crawford goes on to say in her letter that NASAA "asked senior staff at the Commission to provide some reasoning for this decision and in response were told that the staff was 'constrained' from answering our questions."