More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
In a speech last week during the Schwab Impact 2010 conference in Boston, Greg Valliere, a CNBC commentator and chief political strategist at the Potomac Research Group, drew a big round of applause from the packed room of advisors when he pleaded rhetorically to President Barack Obama, “Can you please add at least one person with business experience to your Cabinet?”
In an interview on Election Day, Jim Nagengast (left), the newish CEO of independent broker-dealer Securities America, echoed the desire to see not merely business-friendly politicians in power, but those with experience in balancing budgets, in writing business plans, even in hiring and firing people for a business. Nagengast himself caught the political bug four years ago, and while he ultimately didn’t win the general election to the Nebraska Board of Regents, it taught him lessons that he’s using in his new position.
Other than wishing for a little more business acumen among our political leaders, what are the lessons, if any, that advisors and their clients can learn from this midterm election? How will they affect you?
David Tittsworth is the executive director of the Investment Advisers Association (IAA), but before that he spent quality time on Capitol Hill as counsel on several congressional committees. His reading of the election is that the electorate has sent a “pretty definitive statement,” and that “if you’re a fan of gridlock and partisan sniping, you’ll love the next couple of years.”
With the House in Republican hands, and the Senate in Democratic ones, he believes
“Gridlock is the key phrase. Incremental legislation is possible,” Tittsworth (left) admits, but doesn’t expect any major legislation within the next two years. What will occur, he says, will be “divided government at its best,” though he hastens to say that’s “not necessarily the worst thing.”
For advisors specifically, Tittsworth said, “Dodd-Frank will remain intact,” though he says it is possible you’ll see “some work around the edges with the Consumer Financial Protection Agency, on derivatives and on banking, Fed policy, and Freddie Mac and Fannie Mae—“that will be the focus.”
The coming redistricting process in the states, he said, will be a major effect of Republicans taking more governorships, but that shift in power “won’t affect the legislative agenda in Congress.”
For advisors, Tittsworth says the SEC is “where the main action will be,” but with one exception, “funding for SEC and maybe an SRO like FINRA extending its reach to a large chunk of advisors.” With the divided Congress, “all decisions regarding federal spending will be even more difficult than they are now.” Moreover, while Dodd-Frank doubles the funding for the SEC, “you need actual appropriations for that,” and since the government is getting by budget-wise by means of a continuing resolution, actually appropriating that extra funding for the SEC may be a challenge.
He says that “legislation and oversight are the two big guns Congress has—one of the powers of the gavel is deciding what issues you’ll talk about,” so he’ll be closely watching to see how the Republicans will “wield the gavel in the House.”
There will be new chairmen in Congress—notably Republican Spencer Bachus of Alabama will likely be running Barney Frank’s old House Financial Services Committee, and Tim Johnson (D-SD) moving over into the Chairman’s seat at the Senate Banking Committee following Chris Dodd’s retirement.
Tittsworth recalls that it was Bachus who sponsored the amendment in the House version of Dodd-Frank that would have authorized FINRA “to have inspection and rule-making authority over a big chunk of investment advisors.”
While that amendment was eased out of the final bill, Tittsworth believes it possible that Johnson may pursue that approach again: “That’s the kind of incremental legislation that’s possible.”
Johnson, he notes, is “more of a moderate than Chris Dodd.”
It’s likely that some of the studies being conducted under Dodd-Frank by the SEC and the Government Accountability Office will prompt hearings in the new Congress on those findings, so expect some heat still on Dodd-Frank, even if there's little light.
As for the prospects of any other legislation that might affect advisors, perhaps from a resurgent GOP, Tittsworth reminds us that “You’ve got the guy in the White House with the veto pen; he can prevent legislation. The only way to enact legislation is to find something in the middle.”