More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- 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.
A senior official at the Securities and Exchange Commission (SEC) said Monday that while he believed the securities regulator would issue a rule putting brokers under a fiduciary mandate this year, the agency would hold off on issuing one on the overall harmonization of advisor and broker rules.
Douglas Scheidt, associate director and chief counsel in the SEC’s Office of Investment Management, said during a panel discussion at the Insured Retirement Institute’s (IRI) regulatory conference in Washington, that while it is indeed likely that the SEC will act on the recommendations it put forth in its fiduciary study, which was mandated by Dodd-Frank, the devil will be in the details as to how such a proposed rule is crafted.
Crafting a fiduciary duty rule for brokers is a “thorny issue,” Scheidt said. While some broker-dealers have said they “fully support” a uniform fiduciary standard for advisors and brokers, these same BDs have also said that “we will fight you to death on what it actually means.”
Scheidt said that harmonization of advisor and broker rules, which refers to requiring brokers and advisors to have the same licensing standards, capital and educational requirements, and supervisory structure, “all pose a lot of difficult issues that perhaps over time will be worked out.” His mantra, he said, “is to not impose harmonization for harmonization sake.”
Scheidt’s comments come only days after the Financial Planning Coalition sent a letter to the SEC, which was accompanied by a petition signed by more than 5,200 financial planners, urging the SEC to apply a fiduciary standard to anyone providing personalized investment advice to retail clients. The Coalition is comprised of the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), and the Certified Financial Planner Board of Standards (CFP Board).
SEC Chairman Mary Schapiro (left) has said the Commission will focus in July on the fiduciary duty issue as well as 12b-1 reform. Scheidt stopped short of saying the SEC would issue a rule on 12b-1 reform by year-end. However, he said because the proposed changes to Rule 12b-1 “affects people’s pocket books,” there have been numerous “strong reactions” to the SEC’s proposal.
Now that some of the Dodd-Frank proposals have been issued, like the “switching” of advisors from federal to state regulation issued on June 22, there “will be more time for SEC staff to analyze [the 12b-1 rule proposal] and make progress,” Scheidt said.
Another important item for SEC consideration is the Variable Annuity summary prospectus. Susan Nash, associate director of disclosure and insurance product regulation in the SEC’s Division of Investment Management, who sat on the same panel as Scheidt, said that while it’s difficult to determine whether the VA summary prospectus would appear on the SEC’s agenda this year, “my office is giving the VA summary prospectus very serious consideration.”
IRI released a report the same day that found consumer demand for a VA summary prospectus continued to grow. The report, “Variable Annuity Summary Prospectus High in Demand by Consumers,” found that nearly all consumers (94%) would prefer to receive a shorter, printed summary prospectus instead of a full prospectus if details were available online or upon request.
A similar survey conducted by IRI one year ago found an 86% approval rate among consumers. This year’s report also found that if provided with a short summary prospectus written in clear, everyday language, 59% of consumers would be more likely to discuss the product with their advisors.