More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
Next week is a crucial one for advisors as three reports mandated under Dodd-Frank will be handed to Congress—the Securities and Exchange Commission (SEC) will deliver its studies on the need for a self-regulatory organization (SRO) for advisors on Jan. 17 and fiduciary duty on Jan. 21, while the Government Accountability Office (GAO) will deliver its study on regulation of financial planners on Jan. 18.
While Congress has the ultimate authority as to how the SEC will proceed regarding an SRO, Dodd-Frank gave the SEC full authority to craft a fiduciary standard for brokers, without the need for further legislation from Congress. Lawmakers, however, can go ahead and enact legislation amending the Investment Advisers Act of 1940 to allow the SEC to establish an SRO for advisors without a recommendation or a request from the agency.
The SEC will send its studies to the House Financial Services Committee and the Senate Banking Committee and their chairmen, and it will be up the committees to release the reports. The studies may be released first by Rep. Spencer Bachus, R-Ala., the new chairman of the House Financial Services Committee, as the Democratic caucus has yet to officially select Sen. Tim Johnson, D-S.D., as the new chairman of the Senate Banking Committee, but is expected to do so when the Senate returns the week of Jan. 24.
Regarding fiduciary duty, “the ball is in the SEC’s court, and it will be the SEC that will move forward” in creating this standard for brokers, said Marilyn Mohrman-Gillis, managing director, public policy and communications at the Certified Financial Planner (CFP) Board of Standards, during a conference call held Thursday by the Financial Planning Coalition. But Mohrman-Gillis says she expects the Senate Banking Committee to hold oversight hearings on the application of the fiduciary standard instituted by the SEC.
As for an advisor SRO, Dan Barry (left), managing director of government relations and public policy at the Financial Planning Association (FPA)—a member of the Coalition along with the CFP Board and the National Association of Personal Financial Advisors (NAPFA)—said during the call that the Coalition “is concerned about the direction” an SRO for advisors is headed. The Coalition “expects the SEC could come out with a study [stating] that an SRO would improve the frequency of [advisor] exams,” Barry said. “But the question is, ‘Is that a good approach?’ ”
The “dominating issue,” Barry continued, in the need for an SRO is the lack of resources at the SEC. The SEC failed to receive more funding from Congress in the recently passed Senate appropriations bill, and Barry conceded that securing more SEC funding going forward will be “a tough battle…but it’s something we have to keep chipping away at.”
Mohrman-Gillis added that "there is going to be a fee assessed against advisors in any likely outcome" regarding increased oversight of advisors. "If there is to be increased oversight of advisors, and increased appropriations [for the SEC] are not viable, it has to be paid for by user fees directly to the SEC or user fees paid to an SRO that the SEC would be authorized to designate."
Providing the SEC with more funding to boost its existing examination structure for advisors makes the most sense, Barry argued, instead of appointing an outside agency like the Financial Industry Regulatory Authority (FINRA) as an SRO. The time it would take to create an SRO is also an issue, he said. Creation of an SRO would not only require legislation, but the SRO “would have to ramp up to get the needed expertise and come up with an exam [schedule] and get boots on the ground to examine investment advisors.”
FINRA, Barry continued, “would have to create a separate entity or otherwise restructure its government structure” to oversee advisors. Barry went on to say that the Coalition hopes Congress carefully weighs whether an SRO “should be just for investment advisors, whether it should have a majority public board, and the expertise” needed for not only an SRO’s staff, but also outside counselors to direct the SRO on how it should oversee advisors.
The Securities Industry and Financial Markets Association (SIFMA) sent a comment letter to the SEC on Jan. 12 encouraging the agency to appoint an SRO for advisors. "Putting in place a regulatory regime that puts clients' best interests first must also ensure there is comparable examination and enforcement of those providing personalized investment advice to individual retail investors," said Ira Hammerman, senior managing director and general counsel at SIFMA.