More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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.
Even though the SEC is still making up its collective mind about the whether and how of a fiduciary duty for brokers, the increased awareness of the fiduciary duty resulting from financial re-regulation is already having visible effects. The Department of Labor, for instance, is tightening up its rules regarding advisors’ roles in defined contribution plans.
On Oct. 21, the DOL issued a proposal to end the 35-year-old exemption for advisors who work with 401(k)s and other types of retirement plans. Under the new rule, an advisor’s fiduciary duty under ERISA section 3(21)(A)(ii) would be amended to include: “Advice or recommendations as to the management of securities or other property.” Until now, most advisors and brokers working with 401(k) plan sponsors have avoided a fiduciary duty by outsourcing the investment manager due diligence, or simply relying on their firm’s approved lists. Under the DOL proposal, their fiduciary duty to select appropriate investments would no longer be transferable.
Then, according to fi360 (the folks who offer fiduciary credentials and standards for advisors and brokers), the SEC is expanding the fiduciary duty to municipal advisors. It seems that Section 975 of the still largely unread Dodd-Frank Reform Act imposed a fiduciary standard on municipal advisors. For the first time, firms registered under the Securities and Exchange Act of 1934 will have a blanket fiduciary duty to their clients. What’s more, also for the first time, FINRA will have to apply more than a fair dealing standard to municipal advisors.
So what, I hear all you non-municipal advisors ask? Here’s what: the SEC has to approve the rules proposed to enforce this new standard and what it decided may offer us a clue as to what it’s thinking about a broker standard, as well. In this case, it seems the Municipal Securities Rulemaking Board (MSRB) proposed prohibiting the common practice of advisors offering advice to an issuer of muni bonds and resigning to serve as the underwriting broker—the proverbial “two hats.” The brokerage industry protested this affront to this age-old practice, but the SEC would have none of it, and now one of those
hats must remain in the closet for every transaction. Said fi360: “…activity in this area by the MSRB may have a ripple effect on standards to beestablished by the SEC for other broker-advisors.”
In particular, such a ripple might wash over similar self-dealing activities by brokers when providing advice to retail clients. Historically, brokers were restricted from these actions under the ‘40 Act, but in 2007 at Wall Street’s request, the SEC created a safe harbor under which brokers offering advice could self-deal, despite the conflicts of interest. To be consistent with the muni advisor ruling, the SEC would make these conflicts once again out of bounds.
Whether the SEC will be consistent is, of course, anybody’s guess. And DOL rulings don’t affect the SEC at all. (In fact, I was surprised to hear that early last year, a joint SEC/DOL task force was created to compare how each watchdog applied a fiduciary duty. I would have thought lawyers in both camps would be well aware of what the other ruled. Silly me.)
Still, the bigger picture is that public and political awareness of the fiduciary issue is causing movement across a wide front toward more client-oriented rules and regulations. I’d be surprised if the SEC didn’t feel an equal amount of pressure to come out with a robust fiduciary standard for brokers, as well. But I’ve been wrong before.
(See a report on retirement plan advisors and their fiduciary duty from the 2010 Retirement Income Symposium.)