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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Financial Services Institute’s OneVoice 2011 conference kicked off in Phoenix Monday night with a question-and-answer session with Richard G. Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA). Moderated by Dale Brown, FSI’s president and CEO, the conversation touched on reaction to two recently released SEC studies.
As for the conference itself, Brown reported Tuesday morning that FSI was pleased with the record number of attendees at OneVoice--590. The conference is designed for top-level executives and other home office staff members at independent broker-dealers.
One of the SEC studies involved the standard of care required of financial professionals; the other involved the appropriate level of regulatory oversight. Beginning with the appropriate level of oversight, Brown asked Ketchum about what surprised him most about the study’s results.
“Nothing really surprised me,” Ketchum (left) said. “We seem to be going through a rather arduous process, but I must point out that we are still at the beginning of this process. The SEC acknowledged very clearly that they do not have the resources to address what is needed in these areas and offered three solutions.”
Brown interrupted Ketchum to ask about the proposed solutions, which were:
- Authorizing the Commission to impose user fees on SEC-registered investment advisers to fund their examinations by the Office of Compliance Inspections and Examinations (OCIE);
- Authorizing one or more self-regulatory organizations (SRO) to examine, subject to SEC oversight, all SEC-registered investment advisers; or
- Authorizing FINRA to examine dual registrants for compliance with the Investment Advisers Act of 1940 (Advisers Act)
Brown noted that the organization has already endorsed FINRA as their choice for the second recommendation. He also noted that one proposal, to make FINRA the sole regulator of dually registered representatives, was a bad idea due the increased regulatory burden.
Ketchum responded by explaining the SEC’s intention in making the recommendation. Since FINRA understands the independent contractor business model, it would free up the SEC to use its resources to focus on the “other side of the ledger.” But he agreed that the creation of one or more SROs would be a better solution.
When asked about the politics and timeline involved in a possible solution to the oversight question, Ketchum said he didn’t see much happening before September or October 2012, and even that, he acknowledged, would be a major achievement.
“But Rep. Spencer Bachus [R-Ala., chairman of the House Financial Services Committee] believes the SRO recommendation is sound, and I believe it will result in a fair hearing on the subject.”
Brown informed Ketchum there were three points of view among audience members; those that like FSI’s endorsement of FINRA as the sole SRO; those that like the idea of the sole SRO concept, but do not want FINRA involved; and those that don’t like the SRO solution.
“I understand,” Ketchum said. “This is why we need a discrete board, and a discrete senior staff with loads of experience. We have to improve our oversight where the SEC lacks resources, but we have to do it in a way that is sensitive to the way in which you conduct business with clients.”
Brown then moved on to the second of the two studies; the advisor’s standard of care, and specifically asked Ketchum what the term fiduciary meant under FINRA for independent broker-dealers.
“First and foremost, effective disclosure,” Ketchum responded. “What type of cash and non-cash payments are received by the firm in the form of incentives? Also, understanding fees and fee structures is important. A summary document that explains all this is good, but I’m really taking about a layered approach that allows the customer to drill down into detail in a web-based format. This type of 'layered-disclosure' is a big way to go."
But Ketchum added he believed there was a second part to consider.
“Why is the recommendation you are making the absolute best recommendation in the interest of the customer?,” he asked rhetorically. “It won’t be the only recommendation, but we have to figure out a way to show them why it is the best. We are in an environment where no one is happy with how the disclosure process works.”
Prior to the question-and-answer session, Brown began the keynote by noting the organizations recent achievements.
“Protecting the independent contractor status is the most important achievement of 2010," he said. “We had to watch it closely because we felt it would be attached to another bill. Sure enough, it was attached to the bill for 9/11 first responders. Even though those heroes need to be honored and cared for, it had no business being there.”
Bill Dwyer, chairman of the 16-person board of directors also spoke, noting that the demand, and the need, for independent financial advice are at all-time highs.
“We are at a unique point in history, a confluence of events that means an organization like FSI must be vigilant to ensure the voice of the independent broker-dealer and advisor is heard,” said Dwyer, president of national sales and marketing for LPL Financial. “Baby boomers are turning age 65 this year. That means 7,000 baby boomers are retiring each day. We should be excited and challenged by this. At the same time, it is the first generation with almost 30 years of investment in defined contribution plans. This all has to be combined by a regulatory environment brought on by a lack of trust from what has occurred as a result of the financial downturn.”