More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
While Washington and the nation were focused on President Obama's early September speech in which he unveiled new economic initiatives and vowed to cut taxes for the middle class, advisory trade groups remained focused on one of their top goals: shaping how the Securities and Exchange Commission (SEC) should proceed with a fiduciary rule for brokers.
President Obama said in his speech in Ohio that he wanted to let President George W. Bush's 2001 and 2003 tax cuts expire at the end of this year.
Under the tax plan passed by the previous administration, Obama said, "taxes are scheduled to go up substantially next year--for everybody." He continued, "I believe we ought to make the tax cuts for the middle class permanent. ... These families are the ones who saw their wages and incomes flat-line over the last decade--you deserve a break. You deserve some help." The proposed income tax cuts for those making less than $250,000 per year, Obama said, would benefit 98% of Americans.
Marc Caden, senior vice president of government affairs for the Association of Advanced Life Underwriting (AALU) in Washington, says that while it looks likely that Republicans will win control of the House and some seats in the Senate (see sidebar), he foresees the tax debate playing out after the mid-term elections. He believes "a deal on taxes" between Congress and the Obama Administration will come in the earlier part of 2011.
It goes without saying that the outcome on income, capital gains, dividends and estate taxes is a critical issue for advisors and their clients, but of equal importance is the outcome on applying a fiduciary standard to brokers. Now that the SEC's comment period has expired regarding the study the regulator is to conduct on putting brokers under a fiduciary standard, industry trade groups are gearing up to continue their lobbying as the securities regulator heads into the rulemaking process.
Advisor Groups Speak Up
The Financial Planning Coalition--which includes the Financial Planning Association (FPA), the CFP Board, and the National Association of Personal Financial Advisors (NAPFA)--sent its comment letter in the late afternoon of August 30. The Coalition told the SEC that the fiduciary standard that investment advisors follow under the Investment Advisers Act of 1940 should be the only fiduciary standard applied to brokers. "It's a pretty clear case that there already exists the correct fiduciary standard," under the 1940 Act, Susan John, president and founder of Financial Focus in Wolfeboro, N.H., and the new chair of NAPFA starting September 1, told Investment Advisor. "Each state has accepted the same fiduciary standard; we don't think any changes [to that fiduciary standard] are in order."
The Financial Services Institute (FSI), however, says in its comment letter to the SEC that there should be a "new standard of [fiduciary] care" that should be "applicable to all financial advisors who offer personalized investment advice to retail customers."
The FSI has received criticism from the industry for its view that there needs to be a newly crafted fiduciary standard. But Dale Brown, president and CEO of the FSI, told Investment Advisor that "independent broker/dealers and independent advisors are going to adapt to whatever changes are imposed on them in the regulatory environment." FSI's concern, he says, "is that it's small investors who won't get the benefit of a new higher [fiduciary] standard if it raises the cost and pushes advice out of their reach." (Read "Dissecting the FSI's Position on Fiduciary" for more on the interview with FSI's Brown).
Principles-Based or Rules-Based?
One of the fears the Coalition has regarding an SEC rulemaking on fiduciary duty is that the regulator might take a "rules-based approach" in applying the standard to brokers and advisors instead of a principles-based approach. "Rules are designed to be broken," John says.