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.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
Monday, August 30, marks the last day the Securities and Exchange Commission (SEC) officially accepts comment letters regarding the study the securities regulator is to conduct on putting brokers under a fiduciary standard of care.
Tons of letters have streamed into the agency since the SEC began accepting them on July 27. Industry groups like the Financial Planning Coalition--which includes the Financial Planning Association (FPA), CFP Board, and the National Association of Personal Financial Advisors (NAPFA)--as well as the Financial Services Institute (FSI) were making finishing touches to their comment letters with plans to submit them late in the day on August 30, while the Investment Adviser Association (IAA) and the Securities Industry and Financial Markets Association (SIFMA) submitted their comments in the early afternoon.
Kristina Fausti, director of legal and regulatory affairs at Fi360, and a former SEC staff attorney, says that the six-month study that the SEC must conduct under Dodd-Frank is, in essence, "underway internally at the SEC. Staff likely have already been monitoring and summarizing the comments for purposes of considering them in the study and preparing the final report for Congress." Fausti says she suspects "the major work related to the study to be complete by late October or early November because the final report will need to be reviewed by various divisions and all of the Commissioners before it is sent to Congress in January."
A couple other notable comments that have been submitted thus far have come from Nancy Lininger, a compliance consultant with the Consortium in California, and Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Florida.
Lininger looks into her crystal ball and tells the SEC in her comment letter that she foresees a future with broker/dealers and RIAs under one regulatory regime. "No longer will we have the broker/dealer and registered investment adviser industries. There will be one registration for firms--one fee--one filing. One registration for reps--one fee--one grand slam exam; [and] one full disclosure document used by all to replace the Form ADV," Lininger says. "Wealth management, life planning, financial planning, asset management, or simple buy and sell securities recommendations will be done under one roof. There will be a choice of fee structures, based on client suitability."
Lininger goes to say that whichever standard an advisor adheres to-- fiduciary or suitability--"it should be consistent for B-Ds and RIAs; but the label is just a label. There will be legal consequences for those that don't follow the rules." She argues that broker-dealers must adhere to "rules that are too constrictive, which are bound to get them in trouble with the regulators. When there is so much minutia to know and follow, you are bound to step out of bounds." But RIAs, she says, "don't have enough rules
and oversight to give them sufficient guidance as to what should or should not be done." Therefore, she says, "the rules and regulatory oversight [for BDs and RIAs] must meet in the middle."
A standard disclosure document for B-Ds and RIAs is also needed, Lininger says, because "all firms have conflicts to disclose, be it by commissioned persons or fee-only advisors."
Evensky, who's also a member of The Committee for the Fiduciary Standard, tells the SEC in his comment letter that the "concerns and objections" of those who passionately object to the "imposition of a real fiduciary standard" are based on a "lack of understanding of the fundamental differences between a suitability and fiduciary standard and misinterpretation of the actual impact of fiduciary standards on current business practices."
The argument being made by broker-dealers and registered reps that suitability standards are already stringent and heavily enforced, and that current regulations already provide strong and appropriate consumer safeguards, doesn't hold water. "This objection is based on a lack of understanding regarding the fundamental difference in the responsibility of a professional in sales (i.e., suitability) versus a fiduciary relationship. Although the difference is fundamental, the confusion is not new," Evensky writes.
Although under a commercial suitability standard there may be strong consumer safeguards, Evensky continues, "no matter how 'high' the standard, the relationship is 'arms length (i.e., caveat emptor),' and the fundamental requirements of a fiduciary relationship (e.g., elimination of conflicts of interest and full disclosure of those that cannot be eliminated) do not apply. The importance of these differences and the lack of the public's understanding have been highlighted by many studies including the Rand Report."
Evensky goes on to list various comments made over the years by regulators that acknowledge the fundamental difference between suitability versus a fiduciary standard.
For instance, Evensky quotes in his letter comments made by Richard Ketchum, FINRA's chairman and CEO, in a March 2009 speech in which Ketchum says that "...the regulatory principals governing the relationship between a B-D and client can be thought of as a balancing of conflicting interests. In contrast, RIAs are subject to a fiduciary standard."
Evensky also quotes comments made by SEC Chairman Mary Schapiro, in which Schapiro said "Fiduciary duty means that the financial service provider must at all times act in the best interest of customers or clients. In addition, a fiduciary must avoid conflicts of interest that impair its capacity to act for the benefit of its customers or clients. And if such conflicts cannot be avoided, a fiduciary must provide full and fair disclosure of the conflicts and obtain informed consent to the conflict."