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.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The Dodd-Frank Act brought closure to numerous regulatory issues, but it failed to resolve the issue of whether broker-dealers should be subject to a fiduciary duty when providing retail investment advice.
Instead, the Act gave the Securities and Exchange Commission an unprecedented rulemaking opportunity to close a gap in regulation and protect Mom and Pop investors from abuses fostered by current standards.
Removed from the glare of the contentious legislative debate over Dodd-Frank, teams from the SEC have been busy this fall preparing a number of congressionally mandated studies as a prelude to rulemaking.
Among the first studies launched by the SEC is an examination of the obligations of brokers, dealers and investment advisers, including an exploration of the regulatory resources and effectiveness of those overseeing broker-dealers and investment advisers who provide services to investors.
As part of the study process, SEC commissioners and staff have been meeting with a diverse group of stakeholders, recently including a delegation from NASAA. I’d like to take this opportunity to share our views.
My NASAA colleagues and I strongly urged the Commission to avoid efforts to adopt or otherwise promulgate a standard that is any less stringent than the Investment Advisers Act fiduciary standard. Financial professionals who provide investment advice ought to be held to the Advisers Act’s well-established fiduciary duty standard.
When receiving investment advice, investors deserve and should be afforded the same level of protection and care no matter which type of financial professional they engage.
The lines between services provided by broker-dealers and investment advisers have blurred over the years, due in large part to brokers marketing themselves as “trusted advisors.” Yet substantial differences remain. As a result, any regulation promulgated by the Commission should take these differences into consideration.
That’s what Congress did when drafting Section 913 of Dodd-Frank. The law recognizes the differences between services provided by broker-dealers and investment advisers and includes provisions addressing different business operations.
For example, the industry has expressed concerns about the continued viability of a commission-based compensation model. Dodd-Frank explicitly states that charging for commissions will not in and of itself constitute a violation and expressly recognizes the need for flexibility in compensation arrangements.
Arguments that imposing a fiduciary duty standard will result in a loss of options for investors and drive up the costs of services are specious at best. Very simply, the law does not limit the ability of advisers to offer advice on a limited menu of products.
Turning to Section 913’s questions about state regulatory resources and effectiveness: There is no request regarding a state-registered investment adviser or broker-dealer to which the states will not promptly and capably respond.
The states, like the SEC, direct significant resources to regulating, examining and enforcing the applicable standards of care. States also detect unregistered activity occurring in our jurisdictions and bring enforcement actions against both registered and non-registered individuals.
The states are the sole regulator over smaller firms and investment adviser representatives. In recognition of the states’ exemplary record of accomplishment in this area, Section 410 of Dodd-Frank expanded the states’ authority over the investment adviser population.
In less than a year, states will assume responsibility for regulating approximately three out of every four IA firms. This new distribution of firms will significantly enhance the effectiveness of investment adviser regulation at both the state and federal level.
Mid-sized investment adviser firms will join smaller firms already regulated by the states, while the SEC will be free to focus its resources on larger, more complex firms. I believe that investors and industry will be better served and investors across the nation will be better protected as a result of this single switch.