More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- 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.
Although the SEC’s “Study on Investment Advisers and Broker-Dealers,” frequently referred to as the Fiduciary Study, and the SEC’s “Study on Enhancing Investment Adviser Examinations” often referred to as the SRO Study, are separate, in the eyes of some industry experts and academics that specialize in financial services issues, the two are linked.
In keynote remarks at a panel discussion and Webcast on Thursday, Tom Bradley, president of TD Ameritrade Institutional, noted that it isn’t that we need more regulation for broker-dealers and registered investment advisors; “it has to be better,” regulation. Bradley says there’s room for both, “a purer sales role, and a purer advisory role,” in financial services, and advises that regulators “get rid of incidental advice,” in which brokers are allowed to give advice to customers in the process of making a sale, but that the advice generally doesn’t have to be in the best interest of the customer.
Hosted by Center on Financial Services Law at New York Law School, and The Committee for the Fiduciary Standard, the panel was introduced by Ronald Filler, professor of law and director, Center on Financial Services Law. This editor is a member of the Committee.
The event brought together James Fanto, professor, Brooklyn Law School; Thomas Selman, EVP, Regulatory Policy, FINRA; Michael Koffler, partner, Sutherland Asbill & Brennan; Robert Colby, partner, Davis Polk & Wardwell and former SEC deputy director of Market Regulation and Knut Rostad, chairman, The Committee for the Fiduciary Standard and regulatory and compliance officer at the RIA Rembert Pendleton Jackson. Tara Siegel Bernard, personal finance reporter at The New York Times, moderated the panel.
Noting that many firms have dual roles as BD and RIA, and that often the advice falls under the RIA “umbrella,” Bradley segued to the SRO Study. At issue: the lack of funding for the SEC and the growth in RIA firms means that currently, RIAs are examined only “once every 11 years,” the SRO Study says. The SEC listed three recommendations: RIAs could pay fees to the SEC and have the SEC remain as the RIA supervisor and enforcer; form a self-regulatory organization (SRO) for RIAs (FINRA would like that role, according to Selman), and/or FINRA could be the SRO for BDs who also have an RIA arm.
Bradley says 50% of his RIA clients said in a recent survey that they want the SEC to remain their regulator. For “dual firms, it makes sense for the SEC to farm out exams to FINRA,” he added.
Panelists praised the SEC’s Fiduciary Study as thoughtful, but parts of the study are “vague” said Fanto, who is concerned that disclosure of conflicts could end up as like the “summary disclosures for privacy policies, [provided] once a year.” Fanto says retail investors wouldn’t benefit much from that.
Koffler explained that the fiduciary “debate started in 1994” and that the Fiduciary Study, written by SEC Staff, engendered dissent from two SEC Commissioners, Troy Paredes and Kathleen Casey.
Selman, who is “optimistic” that a fiduciary standard will be put into place, said “it’s apparent there’s no justification not to protect the BD customer with the” fiduciary standard. But he noted the “ ’40 Act [Investment Advisers Act of 1940] needs improvement, and said RIAs are on an “honor system today.” He noted that there would be likely user fees whether Finra or some other entity was an SRO for RIAs, but went so far as to say the SRO “doesn’t have to be Finra,” though he noted Finra’s “economies of scale,” already in place.
Colby noted that the fiduciary standard is “important as people save for retirement.” He noted that brokers “have for a long time provided advice, with sales rules.”
Rostad highlighted “11 words,” in the report from the Financial Crisis Inquiry Commission: “We conclude there was a systematic breakdown in accountability and ethics,” asserting that these words would be very “important to rulemaking that follows,” the Fiduciary Study. He said there is a concern that disclosure, if used instead of mitigating conflicts of interest in the investors’ favor, would take the advisor-expert’s accountability out the fiduciary standard, putting the decision on the shoulders of the individual, rather than the expert—effectively voiding fiduciary duty, to the detriment of investors.
Bradley pointed out the “the two different cultures,” BD and RIA, “still need to find a way to completely separate pure advice from pure sales—there’s a role for both. He also said although RIAs are currently less heavily regulated, there are “fewer problems in the RIA world than in the BD world.”
View the Webcast, uncut, right here.