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.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
The problem with analyzing complex documents such as, oh, I don’t know, laws,for instance, is that we all have a tendency to focus on the parts we like, and overlook or at least downplay the parts we’re not so keen on. I’m beginning to suspect that some of us—me included—have been guilty of such rosy thinking about Dodd-Frank Section 913, and the Obama Administration’s Financial Reform white paper that initiated it. This notion recently hit home for me as I was reading AdvisorOne Washington Bureau Chief Melanie Waddell’s excellent interview with SEC chairman Mary Schapiro for the 2011 IA 25.
In this case, it was a pretty understandable oversight as regards the regulation of financial advisors, as both of the key principles behind the white paper and Sec. 913 sound eminently reasonable: to create a fiduciary standard for brokers that is no less stringent that the duty of RIAs under the ’40 Act, and to “harmonize” the regulation of brokers and investment advisors. To the minds of many of us, both appear to be worthy goals, which have been a long, long time coming. Yet in our exuberance at the prospect of finally getting a much needed upgrade in the protection of financial consumers and simplified regulations for financial advisors, few us stopped to question—again, me included—whether in fact these two goals were actually compatible, or even complementary.
It was while reading this quote from the interview with Schapiro when the light bulb came on: “[much of the attention regarding theSection 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.”
The reality is that we’re taking about two very separate and basically unrelated ideas here—a fiduciary duty for brokers and harmonizing regulation—but because the Administration’s white paper asked for both in the same paragraph, they have become linked. Because the problems have become linked, their solutions have become linked, even though the “solutions” have very little to do
with each other. And it’s through this artificial linkage that the issue of “cost” has been irrationally applied to the broker fiduciary standard.
It’s true that the SEC currently regulates RIAs (although they’ve handed off many of them to the states, thanks again to Dodd-Frank). But they don’t “regulate” the fiduciary duty that RIAs have to their clients. That’s left up to the courts. Consequently, there is no “cost” of a fiduciary duty. So should a similar standard be applied to brokers, there won’t be any “cost” to that either.
But “harmonized” regulation is an entirely different story: brokers are heavily and expensively regulated (although with questionable effectiveness as far as consumer protections are concerned). To bring the regulation of RIAs up (or down) to the same level, would indeed be expensive—and unnecessary.
Linking the two has created the opening for SIFMA, FINRA and probably the SEC to argue that in the current budget-busting climate in Washington both goals should be scrapped at the present time. When Waddell asked about the prospects for a broker fiduciary rule, Schapiro tellingly replied, “…if the Commission proceeds with discretionary rulemaking….”