More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- 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.
This is an extended version of an exclusive interview with SEC Chairman Mary Schapiro, part of AdvisorOne's Special Report profiling this year's members of the IA 25, the most influential people in and around the advisor universe. See the complete list and Special Report schedule for extended profiles of all the 2011 members of the IA 25.
If anyone knows how to handle being on the hot seat, it's Mary Schapiro. During her little more than two years as chairman of the Securities and Exchange Commission, Schapiro has not only been grilled numerous times by members of Congress on the agency’s mishandling of the Bernie Madoff Ponzi scheme and how she continues to transform the SEC post-Madoff, but she’s also had to justify to lawmakers why the securities regulator needs more funds to do its basic job of policing Wall Street and implementing a substantial amount of rulemakings under Dodd-Frank.
Since taking control of the House in January, Republicans’ dual goal has been clear: Scale back Dodd-Frank and starve the SEC of any additional funds. The latter has taken a toll on the agency’s ability to perform its core functions. In an interview with Investment Advisor in early April, as the federal budget debate on Capitol Hill raged, Schapiro said that “it’s hard to be too specific about how investors in the market will be most affected by cuts in [the SEC’s] funding, because it really does depend on how deep the cuts are.” The SEC, she continued, “will have to make very difficult choices if the cuts are deep about what priorities we can continue to support and which of our activities, while still very important, are just ones we’re not able to support without additional resources.”
In mid-April, the House and Senate had passed another week-long continuing resolution (CR) to fund the government, with no agreement in sight on a long-term budget deal. The SEC, which is still subject to annual appropriations from Congress, did get a $74 million budget boost under the FY2011 CR, but it left the agency still short of the funds it was allotted under Dodd-Frank. Without being awarded additional funds, Schapiro said, “it would be extremely difficult, virtually impossible, for us to do any hedge fund oversight or OTC [over-the-counter] derivatives rule operationalizing,” which are both mandates under Dodd-Frank.
But a bigger worry for Schapiro is that lack of funds could compromise the SEC’s ability to detect another Madoff-type fraud. The SEC has “done so much in the last two years to reform the way the agency operates and to help ensure that an episode like [Madoff] never happens again,” she said. “While no regulator can ever say it will catch every fraud, we have accomplished much to help reduce the likelihood of a fraud going undetected.” However, “much of this [continued oversight of Wall Street] requires resources, and we would be hindered if we don’t have the funds to hire examiners or update our technology to analyze trading patterns.”
When Schapiro spoke with Investment Advisor in April 2010, she was in the midst of pressing Congress to grant the SEC the legislative authority to put brokers under the same fiduciary standard as advisors. Dodd-Frank gave the SEC that authority when the Act became law last July. But Schapiro said in her April 2011 interview that a proposed rule on fiduciary duty won’t come “until the second half of this year,” as the SEC must first “plow through” a number of rulemakings that have “strict” deadlines under Dodd-Frank.
Schapiro said she and a cross-divisional task force at the agency—which includes staff members from Investment Management; Trading & Markets; the Office of Compliance, Inspections and Examinations (OCIE); Risk Strategy and Financial Innovation; and Enforcement—are now meeting with “interested parties to hear their views about the [fiduciary] study” that the SEC conducted under Section 913 of Dodd-Frank. “A number of people want to weigh in with us about that” study, she said. The SEC, she continued, is gauging “their perspective also about the practical limitation issues” involved with a universal fiduciary duty, as well as the issues “around the enhanced [broker-dealer and investment advisor] harmonization analysis that was proffered in the study.”
While much of the attention regarding the Section 913 study has focused on its findings regarding fiduciary duty “because that’s the more monumental of the issues,” Schapiro said, “there is also a lot of interest in the second issue [harmonization]. So we continue to have meetings with all sorts of stakeholders on how they think it makes sense for us to move forward on both of those” issues.
Besides receiving outside input on the economic ramifications of a universal fiduciary standard, Schapiro said that over the next couple of months a “core team” of SEC economists will “carefully analyze the economic data that is available to us already related to fiduciary duty issues to help inform the rulemaking.”
When asked how the SEC is weighing a recent letter from Republican members of the House Financial Services Committee urging the agency to conduct a more rigorous cost-benefit analysis on a fiduciary mandate for brokers, Schapiro replied that while she’s said previously that the agency “will cast a wide net for views on how we should approach issues” regarding the Commission’s rulemakings, specifically in regards to Dodd-Frank, the letter hasn’t “changed anything.”
As with all SEC rules, “any particular rulemaking that comes out of the fiduciary study would have to include a detailed cost-benefit analysis in the proposal. So we’ve always known we would have to do that when we got to the point we would write [fiduciary] rules—if that’s what the Commission chooses to do—coming out of the study.” When the SEC proposes a rule, she continued, “the cost-benefit analysis would be included, we would ask for comment on our cost and benefit estimates, and then when we go to adopt the rule, we would do a more defined cost-benefit analysis. So it’s very much the way we always operate.”
While Schapiro reiterated that Dodd-Frank is clear in stating that any fiduciary duty rule for brokers “can be no less stringent than the duty under the Investment Advisers Act,” more than once during the interview with Investment Advisor she used the caveat, “if the Commission proceeds with discretionary rulemaking” regarding a fiduciary duty. When asked if she believed a fiduciary rulemaking would have the support of a majority of the SEC Commissioners, Schapiro replied: “I don’t know. It depends on what it [the rule] looks like.”
Read more about the rest of the IA 25.
Don't see someone on this year's IA 25 that you think belongs there? Submit their name and your justification for why they should be considered among the most influential people in and around the advisor universe in the Comments field below. We promise to consider reader nominations, but please, no ad hominem attacks on those who were named in this or past years.--Ed.