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.
Despite the advisory industry’s hopes that the Securities and Exchange Commission (SEC) would get a quick start on writing a rule to put brokers under the same fiduciary standard as advisors, it looks as though a rulemaking could come by summer.
An SEC spokesperson told me in early February that the SEC staff has “penciled-in the April-through-July time period” for recommending a fiduciary standard proposal for the Commission’s consideration. “The [SEC] staff is working through the details of a rule and that will take some time,” the spokesperson said.
SEC Chairman Mary Schapiro said in comments at a recent conference in Washington that the SEC has a lot of work ahead of it before it can start writing a fiduciary rule. The agency still has more than two dozen Dodd-Frank rules and studies on its “tentative work plan” before it can begin crafting a fiduciary rulemaking, the SEC spokesperson told me.
Schapiro did make clear in her comments during her speech in early February, however, that the SEC would “begin to consider rules” this year stemming from its recent study on Section 913 of Dodd-Frank, which recommended that financial professionals who provide personalized investment advice about securities adhere to a fiduciary standard of conduct “no less stringent” than that imposed on investment advisors.
The SEC is feeling the weight of implementing the scores of rules and studies mandated under Dodd-Frank. Republican SEC Commissioner Kathleen Casey said in a recent speech that the Sarbanes-Oxley Act of 2002 almost seems “quaint” compared to Dodd-Frank, which is “more than 10 times longer and mandates more than 10 times the rulemakings and studies.” The volume of rulemakings and studies under Dodd-Frank, “coupled with the speed at which Congress expects it to occur,” most within one year, “poses significant challenges to the agency,” Casey said. “The real threat” of such a tight deadline and so many rules and studies to conduct is that the SEC may not be able “to fully consider the rules we are adopting,” Casey said, and that the relatively short public comment periods imposed in an effort to comply with Dodd-Frank deadlines may “undermine their very function of supporting and strengthening the confidence we have in the likely effects of our rules.”
Since passage of Dodd-Frank, Schapiro said in her recent comments that the SEC “has been in overdrive.” In connection with Dodd-Frank, the SEC has proposed 24 rules, adopted six final and two interim rules, and approved two proposals from the self-regulatory organizations. “That’s not to mention the reports we’ve submitted to Congress, the host of roundtables we’ve held and the thousands of public comments we’ve reviewed,” she said.
With the passage of Dodd-Frank, Schapiro listed some of the more burdensome tasks the SEC has been charged with undertaking:
- Having greater responsibility in creating the contours of a new whistleblower program
- Facilitating the registration of hedge fund advisors
- Establishing an entirely new regulatory framework around the over-the-counter derivatives market.
As the securities regulator implements these significant new duties, Schapiro said that the SEC is confronting a serious budget shortfall. The SEC has been operating under a continuing resolution “that has hampered our ability to do what investors and capital markets deserve,” Schapiro said in her February speech. “It is a strain that is already having an impact on our core mission—separate and apart from the new responsibilities that Congress gave us to regulate derivatives, hedge fund advisers and credit rating agencies. It is a strain that will intensify the longer the budget remains at existing levels.”
As required under Dodd-Frank, the SEC has picked the Boston Consulting Group (BCG) to perform a top-to-bottom analysis of the agency; Dodd-Frank mandated that the SEC choose a consultant of “high caliber” to perform such an analysis. Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, said in a staff draft of the Committee’s oversight plan for 2011 that his Committee will review the BCG report to determine whether “legislative reforms” are needed to address the SEC’s organizational structure. Bachus also said the Committee will monitor steps taken by the SEC in response to findings by the Government Accountability Office (GAO) that the SEC “failed to maintain effective internal controls over its financial reporting, due to material weaknesses involving SEC’s internal control over information systems and its financial reporting and accounting processes.”
Time to Harmonize?
Another issue that concerns the advisory industry is whether the SEC will move this year to harmonize broker and advisor regulations. A consensus among industry officials is emerging after the release of the SEC’s 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. Kristina Fausti, head of government affairs at fi360, says 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 the argument that a common SRO should oversee advisors and brokers.
But SEC Commissioner Luis Aguilar said in comments during the same event where Schapiro spoke that the Commission should refrain from taking any actions that could “break things that are working,” and that he does not want to “rush to ‘harmonize’” BD and advisor rules. For instance, he continued, even after the oversight of investment advisors with less than $100 million under management is transferred to the states, a majority of the advisors remaining with the SEC will be small businesses. Since release of the SEC’s report on fiduciary duty, Aguilar acknowledged that there has been much discussion about harmonizing advisor and broker regulation, but in the “rush to ‘harmonize,’” he said “I am not in favor of a multitude of new rules that may institute barriers to entry and could be anti-competitive to small business.” Small businesses have flourished in the advisory industry, he said, “and I would not want to see them disappear and/or be forced into consolidation because the Commission has adopted a series of rules that may not be needed.” Aguilar said his hope was to “avoid increasing costs by harmonizing just for the sake of this proposal on the broader economy.”