More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- 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.
As comments continue to flood into the Securities and Exchange Commission regarding how the securities regulator should proceed in crafting a fiduciary standard for brokers, state regulators continue to collaborate with the SEC on how to switch advisors with up to $100 million in assets under management to state regulation.
The Dodd-Frank Act stipulates that advisors with assets up to that amount will now be regulated by the states.
Patty Struck, the Wisconsin securities commissioner and chair of the North American Securities Administrators Association's (NASAA) Investment Advisor section, says that NASAA is "currently in the conference call phase [regarding] the collaboration between NASAA and the SEC," regarding the transfer of advisors, and the two regulators "will be scheduling meetings in person in the near future."
Details on the NASAA and SEC meetings will be discussed at NASAA's annual conference, which will be held September 26-28 in Baltimore, Struck says.
Denise Voigt Crawford, Texas Securities Commissioner and president of NASAA, says she hopes the departure of Buddy Donohue in November as head of the SEC's Division of Investment Management won't delay the transfer-of-advisor talks, as staff from Investment Management have been participating in those discussions.
Crawford will be leaving her post as NASAA president on September 28; that's when Dave Massey, Deputy Securities Administrator of the North Carolina Securities Division, will be christened NASAA's new president.
Despite the fact that state budgets are in peril, Crawford says the states are "ready to go" in regulating the approximately 4,000 extra advisors that will officially shift next year.
Crawford sat down with Washington Bureau Chief Melanie Waddell at Investment Advisor's Washington office on August 18 to talk about the switching of advisors--which also includes some small hedge funds--NASAA's fears about the fiduciary rulemaking outcome, and the challenges ahead in implementing the Dodd-Frank Act.
How's the progress in state regulators meeting with the SEC to hammer out details of the switching of advisors?
We [state regulators] agreed to take on this responsibility [of regulating those advisors] because [3,000] advisors were not being examined by the SEC. We need to work through the individual directives... with the SEC; it's not like we're starting from a clean slate. The advisors are regulated by the SEC until they make the switch; we've got to tell them how to make that switch.
Also, I really believe that just as we saw with the $25 million in asset firms floating back and forth [between SEC and state regulation], we're going to still see that with the $100 million [in asset firms]. That's why we insisted to the SEC that we have one Form ADV Part II.
That worked out. The SEC was initially proposing a bi-furcated Form ADV Part II--one for the federally registered advisors and one for state registered ones--but the Commission did decide to go with one Form.
[Having one Form ADV Part II] was critically important. From [state regulators'] perspective, and from the industry's perspective, they can't be in limbo about what it is they are supposed to do [regarding disclosure].
So no official meetings have been set up between state regulators and the SEC regarding switching advisors?
No official [in-person] meetings have taken place yet. If we could just do the transition [of advisory firms] alone, we could tell the advisors to do this, this, and this, but out of necessity, we must, as regulators, work with the SEC to be sure that transition is smooth from one regulator to another.
Some advisors worry about the regulatory cost burden of making the switch.
The fees associated with the switch are diminimus; while compliance costs could be significant, they are a worthwhile expenditure.
Dave Massey will be coming on board soon as NASAA's new president. What advice have you given him?
During my watch as NASAA president it was all about making sure, under Dodd-Frank, investors were treated as fairly as we could work to make that happen. Now we've got Dodd-Frank and we've got all these other studies, and it's now Dave's job to implement the new law.
That's a tall order.
It certainly is. Over the next six to 12 months ahead... [Dave Massey] will need to make sure the intent of the [Dodd-Frank] law is followed through in the regulations. [Dave's job will be to ensure] strong investor protections set out in Dodd-Frank live through the rulemaking. We don't want to see a whole reopening of the [fiduciary] debate.
What's your biggest fear regarding the outcome of a fiduciary rule for brokers?
We think it would be a big mistake to try to define, with great specificity, what a fiduciary duty is because the whole idea to put clients first is to have a concept in place that is efficiently adaptable to a very large number of different situations.
The [broker-dealer] industry, we believe, is going to take exactly the opposite position. We believe their argument will be, just as it has always been, that we need predictability and we need to have a rule that tells us what [fiduciary] means. So there's going to be an inherent tension there during the course of the SEC study and during the course of the ultimate rulemaking. We want there to be one [fiduciary] duty, and we want it to be the 1940 Act fiduciary duty.
Brokers worry about lost commissions under a fiduciary standard.
The biggest loss of revenue ... will be loss of undisclosed conflict-of-interest based commissions.
The truth is investment advisors have been able to make a living under this [fiduciary] standard, so there's no reason why brokers, under the same standard, couldn't make a living. Commissions are not outlawed [under Dodd-Frank].