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.
- 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.
A consensus among industry officials is emerging after the release of the Securities and Exchange Commission’s (SEC) reports on fiduciary duty and the need for a self-regulatory organization (SRO) for advisors: that the eventual harmonization of advisor and broker regulations signals the likelihood that a common SRO will be created to oversee advisors and brokers. But if the SEC hands any of its oversight responsibilities to an SRO, the SEC must ensure that the SRO can oversee in a fiduciary capacity.
While the study the SEC conducted under Section 914 of the Dodd-Frank Act focused on enhancing the agency’s examination and enforcement activities for advisors, Don Trone, CEO of Strategic Ethos, says that the SEC must be able to ensure that any SRO it appoints “can properly oversee whatever [fiduciary] standard is being promulgated.” In Trone’s opinion, the Financial Industry Regulatory Authority (FINRA) “lacks the sensitivity to oversee a fiduciary standard.” But Brian Hamburger, managing director of MarketCounsel, says that most of the SEC Commissioners have shown a "clear bias" for an SRO and that FINRA is the SEC's prime candidate.
Kristina Fausti, head of government affairs at fi360, agrees that if the SEC seeks to further harmonize the rules for brokers and advisors regarding competency requirements, supervision, and recordkeeping, more “force” would likely be added to “an argument that a common SRO should oversee advisors and brokers.” That said, she continues, “in my view, FINRA or any other possible SRO would still need to gain the confidence of the SEC, industry and public that it can competently take on advisor regulation.”
Over the next six months, the SEC will start the rulemaking process to implement the uniform fiduciary standard of care for advisors and brokers that was articulated in the agency’s report to Congress, and as Trone (left) puts it, to “’harmonize’ the advisor and broker regulations associated with the uniform standard.” It’s important to note, he says, how the SEC uses certain terminology in its reports. For instance, the term “universal” is associated with the standard of care, while the term “harmonized” is associated with the regulations.
If the SEC adopts a uniform fiduciary standard for brokers and advisors, Fausti with fi360 says that “FINRA, as the primary regulator of brokers, would need to acquire staff with the appropriate expertise in fiduciary law and principles-based regulation given that it historically has only been focused on rules-based regulation of brokers.” The addition of that expertise, she says, “could create an interesting situation because if such new rules were to be adopted by the SEC before Congress considers the SRO for advisors issue, FINRA may be given a boost in their argument that they can manage investment advisor oversight because they will gain experience in fiduciary oversight of brokers.”
Hamburger with MarketCounsel adds that “the argument toward harmonization becomes much stronger when both [advisors and brokers] are under an identical [fiduciary] standard.” In an attempt to gauge where the advisory industry is headed post the delivery of the SEC studies on fiduciary duty and an SRO to Congress, Hamburger says that the SRO study actually provides a more compelling read on a potential outcome. Most of the SEC Commissioners have shown a "fondness" for an SRO for advisors, he says, but “an industry SRO only makes sense” when advisor and broker regulation is harmonized.