More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
At press time, the mid-term elections are upon us—which means there’s a good chance the House will flip to a Republican majority—and the Securities and Exchange Commission (SEC) is inching ever closer to finalizing its study on whether a fiduciary duty should be extended to brokers, handing the results to Congress, and launching into the rulemaking process. But what about the other rulemakings that will likely come out of the SEC next year?
While the industry has been focusing its efforts on shaping a rulemaking on fiduciary duty, what hasn’t gotten as much attention in the fiduciary debate is how the SEC will harmonize the rules for investment advisors and broker-dealers. Harmonization will indeed be part of the fiduciary study that the SEC hands to Congress in January, as the study requires the securities regulator to identify gaps and overlaps in the broker-dealer and investment advisor regulatory regimes. According to an SEC official who spoke with Investment Advisor, any “comprehensive harmonization” of advisor and BD rules would require a separate rulemaking that goes beyond just a fiduciary standard rulemaking.
While one aspect of the harmonization debate is fiduciary duty, another part delves into inspection and enforcement rules for advisors and BDs—and the ultimate decision of whether there should be an SRO for advisors. Ron Rhoades, director of research and chief compliance officer for Joseph Capital, says that even after the switching of close to 4,000 advisors from federal to state registration, without self-funding, “the SEC will always be behind the curve” in examining advisors. “I would hope Congress revisits self-funding for the SEC. If the SEC doesn’t eventually get self-funding, we’re going to have some type of SRO for advisors,” says Rhoades. Moreover, he points out that since FINRA is already examining a very huge percentage of advisors who are dual registrants, “the likelihood that any other SRO, or better yet professional regulatory organization, would be able to take on that role is slim.”
Rhoades says the advisory industry should watch the Consumer Financial Protection Bureau (CFPB) carefully, because the broad grant of authority that the CFPB has been given means that it could regulate “anything that the SEC is not regulating,” with some exceptions.
[Read more about the CFPB and its overseer, Elizabeth Warren.]
Schapiro’s Message on Fiduciary for Brokers
While it’s still unclear how the rulemaking process on fiduciary will play out once the study is completed, Schapiro’s comments in her testimony clearly indicate that the SEC intends to put brokers under a fiduciary mandate. Dodd-Frank gives the SEC the authority to write rules, “including rules that would create a uniform standard of conduct for professionals who provide personalized investment advice to retail customers,” Schapiro said. She pointed out that under the Act, “any new [fiduciary] standard can be ‘no less stringent’ than the standard applicable to investment advisers under sections 206(1) and (2) of the Investment Advisers Act of 1940,” adding that the Commission’s “ultimate rulemaking in this area will, of course, be informed by what we learn from our study and from the comments we receive.”
Industry officials say that the Dodd-Frank language stating that any fiduciary standard for brokers can be “no less stringent” than the Investment Advisers Act of 1940 fiduciary language is a clear indication that SEC will put brokers under the same standard as advisors. But Dodd-Frank also states that a fiduciary standard “can be stronger than” the current one that advisors must adhere to.
New Offices, New Reporting
Schapiro noted the agency’s progress on complying with Dodd-Frank in her testimony to Congress. By the end of October, she said, the SEC was expected to have created the new Office of Municipal Securities, and the Commission is currently in the process of establishing a new Office of Credit Ratings and is actively recruiting a new director.
By July 2011, all large hedge fund advisors and private equity fund advisors will be required to register with the Commission. But there is a loophole in Dodd-Frank which exempts private fund firms with between $100 million and $150 million from registering with the SEC. Schapiro said the SEC staff is planning to propose rules on these matters between October and December of this year.