More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
When the Securities and Exchange Commission (SEC) released its Dodd-Frank-mandated “Study on Enhancing Investment Adviser Examinations,” in January, it acknowledged that there currently wasn’t enough firepower at the agency to supervise the growing number of registered investment advisor (RIAs) adequately. It proposed three options for overseeing RIA firms:
- Authorize the Commission to impose user fees on SEC-registered investment advisers to fund their examinations by OCIE;
- Authorize one or more SROs to examine, subject to SEC oversight, all SEC registered investment advisers; or
- Authorize FINRA to examine dual registrants for compliance with the Advisers Act
While some RIA and industry groups have been vocal in support of the SEC getting the funding it needs to supervise RIAs itself, until today there has been little in the way of an alternative to FINRA, the broker-dealer (BD) self-regulator, stepping forward to grab the reins.
But early Wednesday, The Business Law Society (BLS), a group of law students at the University of Mississippi School of Law (Ole Miss), stepped forward with a proposed SRO for RIAs.
The Oxford, Mississippi-based organization is dubbed “Self-Regulatory Organization for Independent Investment Advisers (SROIIA)–that’s pronounced “sir-oy-uh,” the group says. The group was created by law students Timothy Collins and D. Tyler Roberts under the tutelage of the University’s Mercer Bullard (left), associate professor of law, founder of Fund Democracy and senior advisor at PlanCorp. Bullard is also on the SEC’s Investment Advisory Committee.
On a conference call on Wednesday, it was apparent that the group clearly is at the beginning of a long road to becoming an actual alternative to the giant FINRA. "First, Congress would have to amend the Advisers Act to authorize the creation of an SRO, then the SEC would have to approve an applicant," Bullard says via email. The new group is only looking to be the SRO for the 10% of RIAs that are independent RIAs, not those that are affiliated with BDs.
SROIIA's founders don't know how much the group would charge members to join the SRO, how many people it would would need on staff to examine RIAs once every year, or whether the examiners would be law students or RIA professionals or some kind of team.
The SEC routinely examines advisors only once every 11 years, according their RIA Oversight study. But SROIIA’s goal is oversight of RIAs by an RIA-based group that would, in addition to enforcing the Advisers Act, be proactive and preventative, instead of “coming in [to an RIA firm] with an army of examiners and leaving behind a deficiency letter,” says Bullard.
A 'Bona Fide' Fiduciary Standard
The group emphasizes that they would hold RIAs to a bona fide fiduciary standard rather than broker-dealer ‘best interest’ or suitability standard.” The SEC has recommended in a separate study that brokers who provide advice also be held to a fiduciary standard “no less stringent” than the fiduciary standard in the Investment Advisers Act of 1940, but Bullard is concerned that a broker’s “fiduciary “ standard would be less strict than the one RIAs must abide by. Yet, FINRA says it would like to be the SRO for all RAS—not only the ones that are affiliated with broker-dealers (BDs).
Bullard has said that unless funding is increased for the SEC, they will not be able to be the regulator for RIAs.
The release states these goals for the potential new SRO:
SROIIA will be tailored to the specific needs of independent investment advisors. The BLS will explore operational and policy approaches for SROIIA, including:
- Higher Standard of Conduct: Bona fide fiduciary standard rather than broker-dealer “best interest” or suitability standard.
- Inspections: 100% adviser-inspection rate based on regular, small-touch, tailored interactions rather than one-size-fits-all, bi-annual examinations.
- Compliance: Active compliance assistance program rather than “deficiency” based evaluations.
- Conflicts of Interest: Prohibitions of selected practices (e.g., principal transactions, revenue sharing).
- Client-Centered Testing: Qualifications standards based on bona fide fiduciary standard and financial planning competence not limited to securities-related advice.
Stirring the Pot
With the severe budget constraints on the SEC, nobody can say exactly when they will decide on which of the oversight options to push forward. But Blaine Aikin, CEO of fi360, which provides training in fiduciary best practices and the fiduciary process, pointed out in an exclusive interview with AdvisorOne that there had “better be someone ready to step up. We can't wait until we get a clear picture of what is going to happen,” with a potential SRO, or the default might be FINRA—a choice that would be very unpopular with RIAs. Aikin is a member of The Committee for the Fiduciary Standard, as is this editor.
“At Fi360 we believe that a self-funded SEC is the best way to go [for RIA oversight] and that is our hope,” says Aikin. “But [Bullard] might be right that this is not going to happen. Bullard has said that the FINRA ‘fiduciary’ standard would be lower and he’s probably right about that.”
“I applaud Messrs. Collins and Roberts. Their dedication to an “authentic” fiduciary standard is clear and vital for investors. That SROIIA appears to be the ‘first to market’ SRO alternative is a crisp reminder about leadership in tumultuous times,” Knut Rostad, chairman of The Committee for the Fiduciary Standard, told AdvisorOne. Rostad is also regulatory and compliance officer at Rembert Pendleton Jackson Investment Advisors. See "Video: Exclusive—Knut Rostad on Whether a Fiduciary Standard for Brokers Will Rebuild Investor Confidence."
See related Articles about the SEC's studies on SRO and Fiduciary issues:
The Fiduciary Study:
The SRO Study: