More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The Securities and Exchange Commission (SEC) on Wednesday approved sweeping proposed new rules and amendments to existing rules designed to implement provisions of the Dodd-Frank Act regarding improving the regulation of credit rating agencies.
All five of the SEC Commissioners approved the proposal, which is out for a 60-day comment period. SEC Chairman Mary Schapiro (left) called the proposal “massive.”
SEC Commissioner Luis Aguilar noted during the open meeting that the “many components” of the SEC’s proposal address a “broad array” of nationally recognized statistical rating organizations’ (NRSROs) conduct, including:
- a requirement that policies and procedures for ratings methodologies be documented and that they be approved by the NRSRO’s board;
- the requirement for an annual report to the Commission regarding the effectiveness of internal controls over the ratings process;
- enhanced disclosure to ratings users about the methodology and assumptions underlying a rating, the quantitative factors affecting the rating’s reliability, and the findings and conclusions of any third-party hired to provide due diligence regarding an asset-backed security;
- the explicit separation of sales and marketing personnel from the production of credit ratings;
- the requirement that NRSROs review ratings activity involving an employee who subsequently leaves to work for the issuer, underwriter, or sponsor of the rated security and disclose the results of this review; and
- enhanced public disclosure of the performance of ratings.
Aguilar said that the “financial crisis that still affects the lives of many Americans exposed serious shortcomings in the performance of NRSRO ratings.” In response, he said, “Congress included provisions in the Dodd-Frank Act to strengthen the regulation of NRSROs and to provide the users of credit ratings with additional disclosures.”