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.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Rep. Scott Garrett, R-N.J., and other Republican members of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises wrote in a March 17 letter to the Securities and Exchange Commission that the agency should refrain from issuing a fiduciary duty rule as “the Commission has not identified and defined clear problems that would justify a rulemaking and does not have a solid basis upon which to move forward.”
Committee members wrote that Section 913 of the Dodd-Frank Act gives the agency discretion to adopt a rule, but doesn’t require it, and the SEC should conduct a “thorough cost-benefit analysis” before moving forward.
Legitimate questions raised by Republicans should be answered. The problem is that the incestuous relationship the SEC has with the industry does not allow a frank discussion of what regulatory reform means to the consumer for fear of criticizing the industry’s current state. The road to better opportunities for the SEC staff goes to the industry—thus a vested interest not to burn any bridges. This is why the industry is still in denial on regulatory reform, and why slam-dunk arguments are not being made for regulatory reform. There are significant structural conflicts that are beyond the control of the broker/advisors which preclude them from acting in the consumer’s best interest:
1. It is still a violation of internal compliance protocol for brokers to acknowledge they render advice and have a fiduciary duty to act in the consumer’s best interest.
2. Industry controlled arbitration proceedings to manage client disputes absolve the broker from any responsibility for their recommendations because technically the broker does not render advice. The industry maintains brokers do not render or imply investment advice; the broker just makes the consumer aware of their investment alternatives. It is up to the consumer to determine investment merit on their own, regardless of how limited the consumer’s investment knowledge and experience may be.
3. Brokers sincerely believe they are acting in the consumer’s best interest except:
- They have no control over the resources or absence of resources provided that are necessary for fiduciary standing.
- They cannot treat trade execution as a cost center to be minimized on behalf of the client as required for fiduciary standing.
- They cannot make recommendations in the context of all the client’s holdings so it is possible to add value.
- They do not have access to technology that makes continuous comprehensive counsel possible required for fiduciary standing.
- They cannot provide transparency in cost and compensation necessary for fiduciary standing.
- They have no ongoing responsibility for recommendations after they are executed contrary to the ongoing fiduciary duty of care and loyalty to the consumer, etc.
Dodd-Frank has established it is the brokerage industry’s responsibility to appropriately resource the advisor and manage conflicts of interest, not the responsibility of the individual advisor. By not properly addressing these resourcing and support questions, the SEC is not supporting the best interest of the consumer and seems to be sympathetic to the best interest of the industry—a misdirection and perhaps abuse of its power. This raises the question: Does the SEC truly understand the issues and the best interests of the consumer?
Why SEC reports to date have not established these points has left an opening for more study when it is clearly not needed.