More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- 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.
AdvisorOne.com Editor-in-Chief Jamie Green has gone way out on a limb by suggesting that I write a blog for his new portal. He's coached me, the executive director of the Investment Adviser Association (IAA) to be more conversational, more informal, more hip (this is like telling an accountant to make his audit report bristle with excitement). I'm willing to give this blog thang a shot. But please don't be shocked and dismayed when you see that my meanderings tend to focus on the scene in DC and, specifically, the latest and greatest on laws and regulations that affect the investment advisory profession.
Perhaps a bit of my background will help explain my "inside the beltway" proclivity. I've been an attorney since graduating from Jayhawk Law School in 1978. I started out my legal career working in state government (in my home state of Kansas) and moved to Washington, DC on Labor Day weekend 23 years ago. Since then, I've either worked for the federal government or, in some capacity, trying to influence it. For the last 14 years, I've run the Investment Adviser Association (IAA), a non-profit organization dedicated to representing the interests of SEC-registered advisory firms. It's our job to interact with federal regulators (the SEC, Department of Labor, Treasury Department, etc.), state securities regulators, international regulators, and - everyone's favorite, the U.S. Congress--on specific laws, regulations, and policies that affect investment advisory firms.
So what's been going on in DC? Since the economic crisis of 2008, our organization has been up to our neck in the "reg reform" debate on Capitol Hill. Last year, I had the pleasure of testifying before the Senate and the House (during my time on the Hill, I helped organize many Congressional hearings but this was my first time sitting on the other side of the witness table). During the past two years, members of our organization wrote, called, and visited members of Congress to educate policy makers about the investment advisory profession and to discuss how different proposals would affect their businesses and the clients they serve.
The result of scores of hearings and an intense debate in the House and the Senate was a game-changing piece of legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act. Unless you have been in a sensory deprivation tank, you know that President Obama signed the Dodd-Frank bill in July. "Dodd-Frank" now refers to more than a lame duck senator from Connecticut and a veteran member of the House from Massachusetts. Dodd-Frank is the law of the land, and what a law it is. Whatever their views on the merits of the legislation--and there are a lot of differing views--no one disputes that Dodd-Frank represents the most far-reaching and significant financial services legislation since the New Deal. At 2,300 pages, the bill authorizes about 250 rulemakings and dozens of studies by U.S. regulators (about 100 rulemakings by the SEC alone).
What Does Dodd-Frank Mean for the Advisory Profession?
Not to be cute, but largely the answer is "it depends." Make no mistake, Dodd-Frank will have enormous consequences for the advisory profession. You don't have to understand all the gory details of the new law but everyone in the advisory biz should appreciate the scale of its potential effect on you and your firm. It will mean more regulations and oversight. Without a doubt, the quantity and complexity of SEC regulations governing investment advisory firms will proliferate. Perhaps even more important, the frequency and intensity of investment advisor (yes, we spell it "adviser" but Mr. Green insists on "advisor," something about "style") inspections will multiply, along with the potential for more enforcement proceedings).
But a lot of the details are very murky right now. The law contains few black-and-white rules of the road. Instead, it directs the SEC and other regulators to conduct loads of studies and provides broad authority to issue regulations on everything from fiduciary standards to executive compensation. It will take a little time for the SEC to conduct studies and issue rules based on Dodd-Frank - but the initial timeframes are months not years. In later installments (if the aforesaid Mr. Green decides to keep me on), I'll have plenty more to say about various aspects of the new law. Not to blow the surprise ending, but it's certainly possible that Dodd-Frank could end up with the SEC making changes to the long-established fiduciary duty under the Advisers Act, imposing broker-dealer rules on investment advisors, and designating FINRA as the self-regulatory organization for the advisory profession (all under the banner of so-called "harmonization" of broker and advisor regulations).
The debate on financial services reform is now beginning in earnest. The forum for important decisions is shifting from the halls of Congress to the corridors of the SEC. Hopefully, the advisory profession will be up to the challenge of ensuring that policymakers understand the implications of how they interpret and implement Dodd-Frank.
I welcome your thoughts about the new law and what you think should be done to deal with potentially troublesome aspects of the legislation...
David Tittsworth is executive director of the Investment Adviser Association, a not-for-profit organization that exclusively represents the interests of SEC-registered investment adviser firms. The Association was founded in 1937 as the Investment Counsel Association of America. The Association played a major role in the enactment of the Investment Advisers Act of 1940, and today consists of more than 475 firms that manage assets for a wide variety of institutional and individual clients, including pension plans, trusts, investment companies, endowments, foundations, and corporations.