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.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
The Securities and Exchange Commission (SEC) released late Wednesday its report to Congress required under Section 914 of the Dodd-Frank Act regarding enhancing the examination and enforcement of investment advisors and whether the agency needs assistance from a self-regulatory organization (SRO) in examining them. The SEC study regarding putting brokers under a fiduiary standard of care is expected out on Friday.
The study, which was prepared by the Commission’s Division of Investment Management with assistance from other divisions and offices at the agency and was approved for release by the SEC Commissioners, details the severe challenge the agency faces in examining advisors, which is largely due to the SEC’s funding woes.
Talk of dissent among the Commissioners in approving the report is evident in a separate letter to Congress from Commissioner Elisse Walter, in which she expresses her “disappointment” with the study results. “Although I voted to release the study, for the first time in my tenure as a Commissioner, I feel that it is necessary for me to write separately in order to clarify and emphasize certain facts, and ensure that Congress knows that the current resource problem is severe, that the problem will only be worse in the future, and that a solution is needed now.”
Congress refused to allow the SEC to be self-funded, so the agency must rely on appropriations from lawmakers. Despite the fact that the agency has received more appropriations through 2015, the SEC report states that the "amount appropriated could be significantly less than the amount authorized" by Congress.
The SEC offers three options to help it better oversee advisors: impose user fees on registered investment advisors (RIAs) to help fund their exams; authorize one or more SROs to examine advisors; and authorize the Financial Industry Regulatory Authority (FINRA) to examine dual registrants for compliance with the Investment Adviser Act.
While the report delves into the advantages and disadvantages of each option, David Tittsworth (left), executive director of the Investment Adviser Association (IAA) in Washington, says that “in considering all the options, [the report] appears to make the strongest case for user fees.” The report, he continues, “also makes clear that Dodd-Frank will result in significant reductions in the number of SEC-registered advisors in the near future, and also underscores the tremendous diversity among advisers. Both of these facts are relevant to the upcoming debate” that will ensue with Congress and the SEC.
Don Trone (left), CEO of Strategic Ethos, says that in his mind, FINRA being recommended by the agency is “the compromise the SEC made with broker-dealers over the fiduciary standard.” The SEC, in essence, said, “We’re going to define a fiduciary standard for brokers providing comprehensive and continuous investment advice, but we’ll put oversight of the standard in the hands of an organization with which you’re familiar--FINRA.”
The SEC went on to state in its report that the agency’s examination program “requires a source of funding that is adequate to permit the Commission to meet the new challenges it faces and sufficiently stable to prevent adviser examination resources from periodically being outstripped by growth in the number of registered investment advisers.”
As the number of advisors has grown, along with their assets under management, the SEC said, the agency’s examination staff has dwindled. Between Oct. 1, 2004, and Sept. 30, 2010, the number of registered investment advisors (RIAs) increased 38.5%, from 8,581 advisors to 11,888 advisors, the study said.
Due to lack of examiners to cover advisors, the frequency of exams has also declined. While 18% of RIAs were examined in 2004, only 9% of them were examined in 2010, the SEC report says.
But in its recommendation to Congress, the SEC said it believes that the number of RIAs and their AUM will continue to grow following enactment of Dodd-Frank, despite its acknowledgement that there may have been various reasons for past periods of "extraordinary" growth in the number of advisors and the assets they manage.
- Increased demand for income-generating, risk management and outcome-oriented products;
- Inflows of assets from retiring baby-boomers and from Individual Retirement Account rollovers;
- An increasing transition from defined benefit to defined contribution plans among large corporations;
- The growing tendency among large employers to enroll their workers in 401(k) plans automatically and, increasingly, to ratchet up employee contribution rates in conjunction with pay increases
- opportunities for expansion by U.S. investment advisers in international markets.