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.
- 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 we enter the New Year, the Republican agenda of “defunding” Dodd-Frank that was aired during 2010 looks to be coming to fruition. Case in point: the Securities and Exchange Commission (SEC) not being awarded extra funds under the continuing resolution (CR) spending bill, H.R. 3082--the Full-Year Continuing Appropriations Act, 2011—which passed the Senate on Dec. 21. Another worry for advisors in 2011: that a debilitated SEC will need oversight assistance from a self regulatory organization (SRO)—namely the Financial Industry Regulatory Authority (FINRA).
As it stands now, the SEC will continue to function under its FY 2010 budget until March 4, which under the CR keeps the SEC’s budget from Oct. 1, 2010, through Sept. 30, 2011 at $1.118 billion. The SEC had requested $1.258 billion in FY 2011. Under the original spending bill, the SEC would have gotten an increase of $205 million, or 18%, over the agency’s FY 2010 budget—putting the agency’s total budget at $1.3 billion. The boost would have helped the agency implement the scores of new rules under Dodd-Frank, and also help the agency with its oversight and enforcement duties as well as give needed funds for technology updates.
David Tittsworth (left), executive director of the Investment Adviser Association (IAA) in Washington, says that the CR “kicks the can down the road” by freezing funding for the SEC and most other federal agencies at 2010 levels. “The stage is now set for a battle between the new Republican majority in the House and the Obama Administration,” he continues, as both sides need to resolve funding issues before the resolution expires on March 4, 2011, or they will face the prospect of shutting down the federal government.
The SEC has listed on its website its “planned” activities regarding Dodd-Frank implementation throughout the New Year, but how this agenda actually plays out remains questionable. SEC Chairman Mary Schapiro (left) has already commented about the SEC’s inability to implement provisions under Dodd-Frank due to lack of funding. As Don Trone, CEO of Strategic Ethos, bluntly states: “If the SEC does not get significant, additional funding it’s not going to be able to support all 243 rulemaking activities [under Dodd-Frank], and 67 studies contemplated in the Act.”
The SEC’s oversight capabilities will be considerably constrained under its current budget, with an SEC spokesman saying the Commission has already cut back on travel for
examiners working out of its regional offices and to freeze hiring for non-critical positions.
But Trone (left) is confident that the SEC’s funding status will not impact the timing of the SEC’s report to Congress on fiduciary duty, which is due on Jan. 21. While Trone does see the SEC instituting a fiduciary duty for brokers, he says that he “doesn’t think the SEC should, or will, attempt to paint every broker with a fiduciary brush. The public will continue to be well-served by traditional brokers who have expertise in selling financial products, have the capacity to execute trades, or provide clients direct access to capital markets (principal trades, IPOs).”
However, Trone continues, “I do believe the SEC will define a fiduciary standard for brokers who are providing retail clients comprehensive and continuous investment advice,” which means “the wide grey expanse which now lies between a suitability and fiduciary will become a bright line.” Trone says he foresees a compliance date of January 2012 for brokers to comply with any fiduciary standards rule the SEC enacts.
The lack of funds for the SEC also increases the likelihood that the SEC will seek Congressional authority to appoint an SRO for advisors. As David Bellaire, general counsel and director of government affairs for the Financial Services Institute (FSI) notes: “The SEC’s inability to secure the necessary funding to implement the requirements of Dodd-Frank highlights the need for creative approaches to regulatory oversight.” This lack of funding, he continues, “is why FSI supports FINRA as the self-regulatory organization for investment advisers. The bottom line is that FINRA is the only viable option available to bolster investor protection for advisory clients.” Other industry groups like IAA oppose FINRA as an SRO for advisors, but Tittsworth concedes that the SEC’s funding uncertainty “could bolster attempts” to establish an SRO for advisors. “FINRA and others will use the lack of SEC funding to bolster their arguments that a self-regulatory organization is needed to increase the frequency of examinations--at no cost to taxpayers,” Tittsworth says.
David Massey (left), president of the North American Securities Administrators Association (NASAA) who regularly blogs for AdvisorOne.com, notes that while the SEC's examination of advisors has been "eased somewhat" by the shifting of about 4,000 advisors to state regulators, "it would be a shame to see legislative intent of Dodd-Frank thwarted by the unwillingness of some in Congress to properly fund the SEC during the implementation phase of this vital investor protection legislation."