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.
As part of a flurry of legislative lame-duck activity at year’s-end, the Senate and House approved Tuesday a continuing resolution (CR) that forestalls a federal government shutdown but that leaves the SEC, among other federal agencies, without some of the extra funds it needs to efficiently run, and expand the operations of, their agencies.
The CR provides funds for the government to operate until March 4, 2011, leaving the 112th Congress to address a broader appropriations bill to fund the government in FY 2011 (an earmark-filled omnibus spending bill was killed in the Senate last week).
In the case of the SEC, the lack of funding has already led the agency to cut back on travel for examiners out of the Commission’s regional offices—only day trips are allowed—and to institute a hiring freeze for non-mission-critical positions. An SEC spokesman said it has also suspended the hiring of expert witnesses in certain trials, such as in complex securities cases, or the taking of depositions in other cases. Those ‘harmed’ investors who may get restitution out of an enforcement action brought by the Commission may also need to wait longer under the budget chill to receive funds due them.
In an interview with AdvisorOne, the SEC’s director of public affairs, John Nester, said the Commission believes that a “well-funded, effective SEC is essential for investors and the markets,” but that having to operate under the continuing resolution is “already forcing the agency to delay or cut back enforcement and market oversight efforts.” Nester further said that the longer the SEC “operates under significant budgetary restrictions, the greater the impact.”
The continuing resolution keeps the SEC’s budget for the current fiscal year—which runs Oct. 1 through Sept. 30, 2011—at the FY 2010 level of $1.118 billion. The SEC had requested $1.258 billion in FY 2011. The SEC is also one of those government agencies that takes in more than it spends, so it is never a net contributor to the federal budget deficit.
The Commission will continue to write rules, but its oversight ability is being compromised under the budget uncertainty, as is its ability to hire examiners with specialized knowledge and skills to oversee hedge fund managers, for example, or high-frequency trading.
Whether the budget uncertainty will affect the Commission’s ability to carry out a host of specific studies, rulemakings and
new offices mandated under the Dodd-Frank financial services reform bill remains to be seen.
Already the Commission has publicly listed a number of steps required under Dodd-Frank that it says it cannot implement due to “budget uncertainty,” including creation and ongoing staffing of offices of the Investor Advocate.
There is one provision of the CR passed Dec. 21 that that will likely affect the SEC: like other federal employees—excluding the military and self-funding agencies like the FDIC—SEC staff will likely see a two-year pay freeze effective Jan. 1, 2011.
Concern From Sen. Johnson Over Effects on SEC
Sen. Tim Johnson (D-S.D.), who sits on both the Senate Appropriations and Banking committees, expressed his concern following passage of the CR over how agencies like the SEC and the Commodity Futures Trading Commission (CFTC) would be able to meet their responsibilities under Dodd-Frank.
In a statement, Johnson said that the success of Dodd-Frank “and its ability to protect consumers and investors hinges on Congress providing increased funding for agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission. Under this funding bill, these agencies could face a lack of resources that ultimately leaves investors more vulnerable.”
In addition to some of the steps mentioned above that the Commission won’t be able to take, Johnson provided a laundry list of other issues forced by the budget uncertainty:
- Quality tips and investigations will not be pursued due to a lack of resources.
- The SEC’s Enforcement program will be severely limited in how it can litigate enforcement matters.
- Without advancements in IT and specialized skill sets, the agency will be seriously undercut in its ability to pursue quickly evolving market practices, transactions and products in areas such as hedge funds, swaps, CDOs and other derivatives; complex market abuse activity, including in such areas as high-frequency trading, dark pools and other market structure issues; and complex insider trading and market manipulation schemes.
- Delay ongoing actions to enhance risk identification and economic analysis capabilities of the agency
- Backlog in requests for regulatory exemptions and no action letters
- Significant reduction in the reviews of public filings of large financial institutions and structured finance.
Longer Delays in RIA Examinations
Perhaps most important in the ongoing battle over whether there should be a self-regulatory organization (SRO) for investment advisors—an issue the SEC is studying under Dodd-Frank—Johnson argues that “right now the SEC can examine fewer than one of every 10 investment advisors each year.”
Johnson charged that even under current funding, “some mutual fund managers already go over a decade without having to open their books for regulatory inspection,” but that under the CR, “the SEC would be forced to conduct even fewer examinations of mutual fund managers, hedge fund managers and broker-dealers.”
The president and CEO of the Financial Services Institute (FSI), Dale Brown (left), said in an interview on Tuesday that the B-D group’s decision to endorse FINRA as the SRO for investment advisors was in large measure dictated by its members’ concerns over the resource challenge faced by the SEC and state regulators.
“No one’s questioning the commitment to the cause of the SEC, nor state regulators,” Brown said, but argued that “there are serious questions about resources—the SEC has never had the resources to do its job. The SRO addresses that resource issue.”