More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
The Securities and Exchange Commission proposed a rule on Wednesday that would require certain financial institutions to disclose the structure of their incentive-based compensation practices, and prohibit the institutions from instituting pay arrangements that encourage unnecessary and inappropriate risk.
The proposed rule stems from Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the SEC and several other agencies to jointly write rules and guidelines.
The SEC-regulated financial institutions affected by the rulemaking include broker-dealers and investment advisors with $1 billion or more in assets.
“Our staff has worked closely with other federal regulators and the proposal reflects a series of carefully considered compromises,” said SEC Chairman Mary Schapiro (left) in a statement. “As with any such undertaking, there’s a challenge in finding common means to appropriately address Congress’s mandate, so we look forward to hearing public comment on the proposed rules.”
The SEC’s proposed rules for certain financial institutions would:
- Require reports related to incentive-based compensation that they would file annually with SEC.
- Prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the firm.
- Provide additional requirements for financial institutions with $50 billion or more in assets, including deferral of incentive-based compensation of executive officers and approval of compensation for people whose job functions give them the ability to expose the firm to a substantial amount of risk.
- Require them to develop policies and procedures that ensure and monitor compliance with requirements related to incentive-based compensation.
Public comments on the rule proposal should be received within 45 days after it is published in the Federal Register.