More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Stay with me on this one. As part of New York’s recent budget cuts, the Division of Kosher Law Enforcement was reduced to a lone director. Due to an ongoing legal battle, however, it turns out that said inspectors haven’t actually been inspecting the producers of kosher products for several years. Instead, The Wall Street Journal reported Jan. 3 that the inspectors’ job was to “monitor grocery stores and restaurants to ensure they are complying with an information disclosure act that requires consumers be provided with information on the person or organization certifying food as kosher.” A state spokesperson said it plainly: “We don’t inspect the meat to see if it’s kosher. We ask them to tell us who certified that meat to be kosher.”
Leaving aside the religious and budgetary aspects of the story (which has a happy ending for those who keep kosher, by the way), it did get me thinking about the financial services world, regulators and advisors’ duty to their clients.
Everyone hates government paperwork and regulation, except when said regulation benefits them. There’s a reason why the USDA inspects slaughterhouses: to ensure that the food American consumers, uh, consume is safe. The SEC’s duty since 1934 has been to protect investors, “maintain fair, orderly and efficient markets” and “facilitate capital formation.”
Advisors’ jobs, as my friend and IA Editor-at-Large Bob Clark has said for years, is to protect their clients from the financial services industry. That’s because—I know this will shock you—some human beings are not just venal, but greedy no-goodniks. If there is money on the table, there will be advisors and brokers who will bend and break the rules to take it, and there will be employers and partners of who will not only look the other way but actively aid and abet them in doing so because, well, there’s money on the table.
As we go to press, the SEC is poised to report to Congress on several studies mandated under Dodd-Frank, including one that might set up a new SRO for advisors (FINRA has been leading the pack in this horserace, but my latest intel says the CFP Board may nip the former NASD-NYSE Regulation body at the wire.)
Let’s go back to the kosher inspectors. The reason why the U.S. military is exempt from the new federal pay freeze and from the Tea Party and GOP’s budget chopping block is partly because a government’s prime mandate is to protect its citizens from all enemies, foreign and domestic. That’s why it’s wrong to gut the SEC through punitive defunding, as some Republicans have promised and as Washington Bureau Chief Melanie Waddell has chronicled as part of her superb reporting. In an investing world grown smaller, but where the stakes have grown larger—think how the mortgage mess changed Wall Street and how the European debt crisis is redrawing the international balance of power—you need a strong national regulator, adequately funded and given consistent direction by the executive branch and bipartisan oversight by the Congress. Yes, it has to be appropriate regulation that doesn’t strangle those being regulated, and there’s a role to play for advocacy groups in educating legislators and regulators as to what “appropriate” should be. An appreciation of history and human behavior leads to the conclusion, however, that internal enemies can be the most damaging to a country’s economic health, and the financial services industry’s well-being. Simply checking the paperwork after the fact is insufficient.