More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
“It’s going to be a very active year,” in Washington, says Kevin Keller, CEO of The Certified Financial Planner Board (CFP) of Standards.
Indeed, as Keller and other Washington observers note, the investment advisory industry will be watching carefully as the Securities and Exchange Commission (SEC) hands its studies on fiduciary duty and enhanced advisor exams to the new chairmen of the House Financial Services and Senate Banking, Housing, and Urban Affairs Committees in January, and as these new chairmen go about implementing Dodd-Frank.
As Keller notes, too, also due to the SEC in January is the Government Accountability Office’s (GAO) report to Congress regarding the regulation of financial planners. The Financial Planning Coalition, which includes the CFP Board, NAPFA, and the Financial Planning Association, “has been working closely with the GAO to make sure they understand the perspective that we have.”
The Coalition’s proposal “as Dodd-Frank came together has been to create a financial planner oversight board, not necessarily an SRO, but an oversight board that would set baseline standards and impose a fiduciary duty on anybody that says they are providing financial planning.”
Keller says he hopes the three Congressional committees and their chairmen with oversight over the GAO study’s results—which includes Rep. Spencer Bachus, R-Ala., of the House Financial Services Committee; Sen. Tim Johnson, D-S.D., of the Senate Banking Committee; and Sen. Herb Kohl, D-Wis., of the Senate Special Committee on Aging—will hold hearings in the New Year based on the study’s results.
Republican Congressmen have voiced their desire to rein in implementation of Dodd-Frank in the New Year, but Greg Valliere (left), chief political strategist at Potomac Research Group, says that while Bachus and Sen. Richard Shelby, the ranking GOP member on the Senate Banking Committee, have an “agenda to water down the financial services bill, nothing significant can get enactment because Obama” has the veto pen and the Democrats still control the Senate.
The New Year will also entail implementing the provision of Dodd-Frank that increases the threshold for the SEC’s oversight of advisors to $100 million in assets from $25 million, resulting in the switching of nearly 4,000 advisors to state oversight.
David Massey, president of the North American Securities Administrators Association (NASAA) and North Carolina Deputy Securities Commissioner, says that much of his attention in 2011 will be focused on “making sure that investors and state securities regulators emerge from the implementation process of the Dodd-Frank Act in a strong position,” particularly as it relates to the SEC issuing new rules applying a fiduciary duty on all financial professionals providing investment advice.
Massey says NASAA’s attention will also be focused on “doing all we can to ensure that the switch to state regulation from federal regulation…goes as smoothly as possible.” TD Ameritrade Institutional’s quarterly sentiment survey of 500 RIAs, released in late December, found that more than 40% of RIAs prefer to continue to be regulated by the SEC, with 28% preferring the continued role of the states.
Form ADV Changes
Those advisors with less than $100 million in assets will have to switch their Form ADV registration from SEC to the states in which they do business, and in many cases, these advisors have clients in multiple states. Advisors are also concerned about new Form ADV Part II requirements, which take effect in the New Year. In 2011, advisors will be required to draft a more narrative brochure describing their business practices, conflicts of interest as well as a background of their personnel. They will also have to post the form on their web site and update it at least annually.
A new poll by Fidelity of more than 200 advisors found that nearly 30% said they are “not very confident” in being prepared to fulfill the new Form ADV Part II rules. Fidelity also found that 89% of the advisors polled believe the new requirements “will increase their workload somewhat to significantly.”
Cost-basis reporting will be another compliance chore for advisors in the New Year. The IRS recently finalized the regulations regarding cost-basis reporting, but Jodi Baskin, product manager for SunGard’s wealth management business, says that “there is still uncertainty in the securities industry” about the new regs. “One thing, however, is certain: now is the time to increase communications. It is important to begin to establish key policies and procedures around cost basis reporting. Establishing these procedures early on will assist in dealing with difficult questions that will arise,” Baskin says.
Another point of worry for advisors in the New Year is whether Financial Industry Regulatory Authority (FINRA) will be selected as the self-regulatory organization for advisors. TD Ameritrade Institutional’s quarterly sentiment survey found that only a very small minority of the advisor respondents preferred a new or existing self-regulatory organization such FINRA or the CFP Board to play a supervisory role. While the SEC is being very tight-lipped about where it stands regarding fiduciary duty and an SRO for advisors, an SEC official says that FINRA isn’t necessarily the only option.
But the Financial Services Institute (FSI) is endorsing FINRA as the SRO for advisors. Dale Brown, president of FSI, said in a Dec. 20 statement that under the supervision of the SEC, “FINRA as the SRO would focus on the routine examination and supervision of all investment advisers.” By delegating primary responsibility for investment advisor exams and supervision to FINRA, Brown (left) continued, “the SEC would be free to focus on capital markets concerns, the development of appropriate regulations for all regulated entities, the supervision of the new investment adviser regulatory authority, and the fulfillment of other appropriate regulatory goals.”
The TD Ameritrade survey also found that regarding the pending regulatory oversight changes under Dodd-Frank, nearly 70% of RIAs surveyed agreed that they will have to add resources to manage the new regulatory requirements, while nearly 85% said that they personally will need to dedicate more of their time to compliance issues. Among RIAs with at least some knowledge of the Dodd-Frank bill, the survey found that nearly 75% said that they would rely on third parties, such as attorneys, consultants and their custodians to help them manage their new compliance responsibilities.
Implementing the scores of studies mandated under Dodd-Frank will also be a task the SEC must tackle in 2011, but lack of funding is still an issue for the agency. The massive Senate Appropriations bill that was introduced in mid-December included a $1.3 billion budget for the SEC, an increase of $205 million, or 18%, over the agency’s FY 2010 budget and $41.5 million (3%) over the requested $1.25 billion budget.
Despite the fact that the SEC got more funding under Dodd-Frank, the Commission listed on its website in December its plans to defer launching a number of offices created under Dodd-Frank, like the whistleblower, credit ratings agency, investor advocacy, and municipal securities offices, due to “budget uncertainty.” The boost for the SEC under the Senate Appropriations bill would provide for increased legal and investigative staffing for oversight and enforcement duties, including mandates under Dodd-Frank and “substantial” technology updates needed at the agency.
See AdvisorOne's Outlook 2011 calendar to find the publishing dates for, and links to, other categories in the Outlook series.