More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- 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.
In the vast overhaul of financial services known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is required to study, review and create rules--124 "total actions to implement," according to a SIFMA estimate.
But, "Unlike almost every other financial regulator, the SEC remains without a consistent funding stream," SEC Commissioner Luis Aguilar said in a May 11 "Statement in Support of Extending a Fiduciary Duty to Broker-Dealers who Provide Investment Advice." Though the SEC is set to collect an estimated $1.7 billion next year, according to its FY 2011 Congressional Justification (Justification)--its budget request--it has gotten a fraction of the amount it collects in fees for the past several years. Congress appropriates a dollar amount for SEC each year, and the rest is spent by the federal government. The SEC requested just under $1.3 billion in the Justification for 2011.
In a speech in March at the IA Compliance Best Practices Summit 2010, "A Shared Responsibility: Preserving the Fiduciary Standard," SEC Commissioner Luis A. Aguilar noted the increase in the number of investment advisors registered with the SEC, from: "6,650 registered advisers managing approximately $18 trillion in 1999, to nearly 11,500 registered advisers managing approximately $33 trillion as of January 2010."
But, "between fiscal years (FY) 2005 and 2007, the SEC experienced three years of flat or declining budgets, losing 10 percent of its employees and severely hampering key areas such as the agency's enforcement and examination programs," according to the Justification. And although the number of RIAs is up by 32%, and there are 67% more broker-dealer branches since 2005, because of the years of budget cuts SEC staff is still under the FY 2005 level by about 1%.
The issue is not simply staff numbers keeping pace with increased numbers of entities that the SEC oversees--it is that the Commission cannot make multi-year budgets for technology and other improvements since the funding is only certain one year at a time.
Indeed, Aguilar said in a speech, "Protecting Investors by Requiring that Advice-Givers Stay True to the Fiduciary Framework," in Chicago on April 29: "the single most transformational act that Congress could undertake is to allow the SEC to be self-funded. Unlike almost every other financial regulator, the SEC remains without a consistent funding stream. Self-funding would enable the SEC to set multi-year budgets and respond promptly to our dynamic capital markets, while also maintaining
appropriate staffing. Self-funding would allow us to have the resources to keep up with the growth in the industry."
Even doubling the SEC budget, as the House draft of financial reforms had proposed last spring would have helped, year-over-year, but not long term, if it continued to be a yearly Congressional appropriation. And that's not what ended up in the Dodd Frank Act.
Former SEC Chairman David Ruder told Wealth Manager in an email that, "The SEC still needs self funding. The problem is that its needs far surpass the funds made available be Congress. The Dodd Frank legislation provides for some limited funding for emergency and planning purposes, but fails to provide the ability for the agency to meet long term planning needs. The schedule for increasing SEC funding contained in the Dodd Frank legislation is good, but the appropriation process will still control the amounts the SEC will receive. Efforts to obtain self funding should continue, but there seems little likelihood of success in that endeavor in the near future."
For FY 2009, the SEC collected $1.016457 billion in fees, and Congress appropriated $970 million--a difference of more than $46 million, according to figures from SEC spokesman John Nester. But in FY 2010, the difference is much greater: SEC estimates it will collect $1.52 billion in fees, and Congress appropriated $1.111 billion a difference of $409 million. That missing money is an enormous impediment at a time when the SEC is under pressure to ferret out Ponzi schemers and other bad actors as well as implement numerous investor protection and other regulatory improvements.
Under the New Act
In the Dodd-Frank Act, SEC funding is scheduled to increase over the next five years. In FY 2011, the appropriation will be $1.3 billion, but the SEC estimates it will take in $1.74 billion, leaving $440 million on the Congressional cutting room floor. But more important, the SEC still cannot plan for multi-year projects.
SEC Chairman Mary L. Schapiro noted in her July 20 "Testimony Concerning Oversight of the U.S. Securities and Exchange Commission: Evaluating Present Reforms and Future Challenges," that: "The Dodd-Frank regulatory reform legislation contains a number of reforms to the SEC's funding structure. For example, the language links the SEC's appropriation with the fees the agency collects, so any increase or decrease in the agency's budget would be matched by a rise or fall in fee collections. The legislation also creates a Reserve Fund for the SEC, and requires the agency to submit its annual budget requests concurrently to the Administration and Congress. I believe this new overall structure will be tremendously helpful for the SEC: to cover emergency needs that arise in the middle of a fiscal year; to help pay for multi-year initiatives, particularly new systems; and to make sure our fees are properly aligned with our budget."
That said, if Congress expects the SEC to regulate as necessary, and to protect investors, then it may have to revisit the self-funding issue.
Comments? Please send them to email@example.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.