More On Legal & Compliancefrom The Advisor's Professional Library
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
- 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.
Let me get this straight: Investment advisors currently have a fiduciary duty to their clients, which means they have a legal responsibility to put the interests of their clients first—ahead of their own interests, or the interests of any other party. And most people think that’s pretty cool, including the clients of RIAs, the Obama Administration, SEC Chairman Mary Schapiro—on her good days—and the clients of brokers, most of whom believe (mistakenly) that they already have the benefit of that same duty.
So the SEC staff comes out with a report on Jan. 21 detailing the various studies that unequivocally show that most clients of brokers think their broker has a duty to act in their best interest, and reiterates that, in fact, under current law, brokers have no such duty (just in case anyone reading the study, such as the Republicans in the House of Representatives, suffer from the same ignorance as do most investors). The SEC staff report then goes on to reasonably recommend that the SEC remedy the investing public’s misperception that they have fiduciary protections when they don’t by granting them those protections.
Now, here’s the good part: Both the SEC and the House Republicans (who are reviewing the SEC’s report and its recommendations) coincidentally focus on how the regulation of RIAs can be increased to be more like the current regulation of brokers—exploring just how increased RIA regulation might be achieved and what the cost/benefit trade off of such regulations might look like. You just can’t make this stuff up.
Forgive me if I belabor the obvious, but on the off chance someone who doesn’t see the irony here might read this (say, someone in the SEC or Congress): THE PROBLEM ISN’T WITH RIAs. See, if the problem were with RIAs, we’d be trying to change the laws governing RIAs to be more like the laws governing brokers. But we’re not: we’re trying to require brokers’ behavior to be more like RIAs. Why? Because RIAs act in the best
interest of their clients, as required by law: Specifically, the Investment Advisers Act of 1940. Brokers, in contrast, are specifically exempted from that law (by the aptly named “broker exemption”). So, brokers legally are not required to act in the best interests of their clients, and are therefore free to act in the best the interest of their firm or in their own interest.
Some folks, present company included, think this is an indefensibly dumb idea, and that if retail investors fully understood it, they would think so, too. So we, the Obama Administration, the Congress who passed Sec. 913 of the Dodd-Frank Act, the investing public who understands the situation, and the media who are beginning to get it, all think it would be a pretty neat idea if brokers were required to act more like investment advisors—not the other way around.
If FINRA-type regulations were sufficiently protecting consumers, we wouldn’t be having this discussion. So, maybe we should drop the RIA regulation debate, and simply apply a fiduciary standard to brokers. I’m guessing that faced with investor lawsuits for breach of a fiduciary duty, broker behavior would rather quickly start to mirror that of RIAs. Problem solved.