More On Legal & Compliancefrom The Advisor's Professional Library
- U.S. Securities and Exchange Commission Information This information sheet contains general information about certain provisions of the Investment Advisers Act of 1940 and selected rules under the Advisers Act. It also provides information about the resources available from the SEC to help advisors understand and comply with these laws and rules.
- 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.
Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA), said Tuesday that as the industry moved toward a unified fiduciary standard for brokers and advisors, disclosure was a “key ingredient” that’s needed to address fiduciary issues, but that disclosure “alone is not sufficient.”
In moving toward a fiduciary standard for brokers, Ketchum (left) said that the broker-dealer industry needs “to get away from today’s environment in which account statements contain too much legalistic information, leaving them downright turgid, and causing investors to simply ignore them.” This, he said, is a “fundamentally flawed approach to disclosure.”
Ketchum suggested in his speech at FINRA’s annual conference in Washington that firms ask questions to gauge their relationships with customers. Ketchum said BDs should ask themselves: “’How do we interact in an effective way with investors? How do we foster knowledge and understanding among investors? And how do we deliver that message, both with respect to existing technology tools and with respect to how your financial advisers go through the message?’”
Ketchum noted FINRA’s proposed rule that addresses these questions, and requires firms, at or prior to commencing a business relationship with a retail customer, to provide a written statement that describes the types of accounts and services it provides. Firms would also be required to disclose the conflicts associated with such services.
The fundamentals of a fiduciary relationship, Ketchum noted, are to “avoid conflicts where possible, fully disclose them where not, and take actions—and be able to justify those actions—as being in the best interests of customers.”
As to FINRA’s bid to become the self-regulatory organization (SRO) for advisors, Ketchum noted in a press briefing after his speech that while “it’s too early to tell” if Congress will ask FINRA to be advisors’ SRO, and also “difficult to predict” whether Congress could pass such legislation authorizing such a move this year, the Securities and Exchange Commission’s (SEC) lack of resources to examine advisory firms makes an SRO for advisors look imminent.
FINRA is lobbying hard to be the SRO for advisors. Not only has it hired Michael Oxley, the former Republican congressman from Ohio who served as chairman of the House Financial Services Committee and co-authored the Sarbanes-Oxley Act of 2002, to lobby on its behalf, it also has large BDs like LPL Financial in its corner. Mark Casady (left), CEO of LPL, told FINRA attendees on Monday that he supports FINRA being named the SRO for advisors.
Ketchum also noted in his speech that FINRA is enhancing its examination program to ensure its exam teams are “more focused on those areas that present a real risk to investors.” FINRA’s goal, he said, “is to have a much more in-depth understanding of your business and how it’s changing from the standpoint of business model, products and market events.” A “major focus” for FINRA as well, Ketchum said during the press briefing after his speech, are sweep exams.
FINRA examiners, Ketchum said, are also “paying closer attention to branch-level activity—increasing the number of branch exams, and refocusing our exams at point-of-sale.” During 2011, he said, “the examination staff also plans to spend more time on site at the branch offices and, depending on the firm, less time at the main office.”
On the product side, Ketchum warned about the troubling proliferation of structured products. More than 8,000 retail structured products were sold in 2010, he said. He also noted that the “number and range” of exchange traded funds (ETFs) as well as exchange-traded notes “are coming out in breathtaking numbers.”
The “increasing availability of complex and sophisticated products to retail investors, while beneficial in some ways, can present challenges to a compliance department. Investors can trade exchange-traded products that provide the ability to speculate on the volatility of the securities markets or the spread between various asset classes.”