More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- 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.
Congress’s clear intent to reduce the SEC’s funding was the first shoe to drop on the future of broker/advisor reregulation. The second shoe is the little reported release on March 10 of another Dodd-Frank mandated study, this one by Boston Consulting Group on “SEC Organization and Reform.” The D-F charge was “to engage an independent consultant to examine the internal operations, structure, and the need for reform at the SEC,” and to meet that goal, Boston Consulting looked at the SEC’s “organization structure, personnel and resources, technology and resources, and relationships with self-regulatory organizations (SROs).”
Like most of the studies related to the Dodd-Frank reregulation, this one is lengthy—261 pages—yet, as you can see from the above description, most of it pertains to very “inside the SEC” operational details, except the part about SROs. Yes, the plot thickens. Much of the former seems to involve pretty basic analyses, such as: “The SEC should engage in a rigorous assessment of its highest-priority needs in regulatory policy and operations, and reallocate resources accordingly.” (No kidding; and these guys get the big bucks for stuff like this?)
But the subtle point of this Study starts becoming clear almost from the get-go. Section 3 is of curious—and therefore, I suspect, telling—construction. Entitled “Context,” it’s really the intro to the Study, beginning with a two-page overview of the SEC starting in 1934, snore, followed by a seven-page discussion of the SEC’s historical and current reliance on SROs (which include nine exchanges, four oversight organizations [including FINRA] and nine clearing corporations). Then Section 3 launches into 14 detailed pages about all the demands on the SEC from the changing regulatory landscape, from evolving capital markets to new Congressional and legal requirements (including oversight of private funds, derivatives, credit rating agencies, asset-backed securitization and corporate governance reform).
Starting to see theme emerge here? The SEC has always relied on SROs to leverage its over-burdened and underfunded staff, and golly gee, if Congress isn’t currently asking the Commission to take on a lot more work (for what looks like less funding): What in the world should we do?
Funny you should ask. The Study concludes Section 3 with: “As discussed above, the SEC has been increasing its reliance on SROs, and recent discussions suggest the possibility that the SEC will rely on SROs in additional areas.”
Boston Consulting’s Study never comes out and says that the SEC should look to an SRO to
take over the burden of regulating investment advisors, nor suggest whom that SRO might be, but the implications seem pretty clear, especially in Section 6.1.4, titled Enhance SRO Engagement Model. “The SEC should seek to build stronger relationships with SROs, both as an overseer and a co-regulator,” the Study says. And goes on to point out: “FINRA is the largest SRO under the SEC’s jurisdiction and is seeking to further expand the scope of its regulatory activities….A more structured approach to oversight of FINRA will enable the SEC to enhance its oversight, [and] ‘stay out ahead’ of any potential regulatory issues…”
The study concludes by recommending two options for Congress: More funding for the SEC, or decrease the Commission’s current role “to fit available funding” and “increase SRO leverage and enhance oversight.” Since more funding in this economic environment isn’t likely, that leaves greater reliance on SROs like FINRA.
While the SEC is beefing up oversight of FINRA, it seems like the perfect time to find something that FINRA could take off the SEC’s regulatory plate, to “refocus its resources.” Who knows what they’ll come up with, but the groundwork has certainly been laid for a smooth transition.