More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The Consumer Federation of America (CFA) released a Dodd-Frank progress report on Wednesday warning that while regulators have made “great strides” in implementing the law’s sweeping reforms, further progress is threatened by congressional efforts to delay implementing needed reforms and defunding regulators, particularly the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
Travis Plunkett, CFA’s legislative director, says that the fate of Dodd-Frank “hangs in the balance.” He notes that while key investor and consumer protections are “generally on schedule and on track, large financial interests and their allies in Congress have taken steps that endanger the long-term success of these reforms.”
Barbara Roper (left), director of investor protection at CFA, stated in the release announcing the progress report that regulators are “working furiously” to put investor protections in Dodd-Frank in place, so “it is up to Congress and the President to ensure that they get the oversight, backing, and resources they need to make the promises of Dodd-Frank a reality.”
The CFA report gauged the progress of key consumer and investor protection provisions of Dodd-Frank and identified threats that could undermine effective implementation.
CFA addressed Dodd-Frank authorizing the SEC to create a fiduciary standard for brokers. While SEC Chairman Mary Schapiro has said the agency will proceed with rulemaking after the one-year anniversary of Dodd-Frank, the fact that “some members of Congress continue to question the need for a heightened standard … could impeded progress,” CFA said in its report.
Another important investor protection issue is the creation of the Office of Investor Advocate at the SEC, which was mandated under Dodd-Frank but has been put on hold due to lack of funding. “The SEC must get approval from House and Senate appropriators for its funding reprogramming plan before it can move forward with establishing this office and hiring a director,” CFA’s report says. The SEC has submitted a plan and is awaiting that approval.
The question remains as to whether the SEC will see a further budget boost. As it stands now, the agency was given a “modest” budget increase to $1.18 billion for this year, which was “very welcome in light of House efforts to cut the SEC budget (but) still below the $1.3 billion authorized in Dodd-Frank,” CFA notes.
The full House, CFA says, is expected to take up shortly — possibly before Congress' August recess — its 2012 financial services funding bill, which would keep SEC funding flat at the $1.18 billion in the coming year despite the fact that the SEC will be taking on “vastly expanded responsibilities” for oversight of securities-based swaps, hedge funds and credit rating agencies.
CFA maintains that the “biggest threat” to effective implementation of the derivatives reforms under Dodd-Frank is lack of funding for the SEC and CFTC. While the House has proposed keeping SEC funding flat in 2012, it has proposed to significantly cut the CFTC’s budget to $171.9 million, leaving the agency “with a staffing level roughly equivalent to what it had when the agency was first created in the 1970s to oversee a relatively sleepy commodity and futures market,” CFA says.
The administration, CFA says, “continues to seek a funding increase to $308 million, and leading Senate Democrats have pledged their support.”
The Consumer Financial Protection Bureau (CFPB) also faces a number of threats to its ability to effectively protect consumers, CFA argues in its report. First, despite the fact that President Barack Obama recently nominated former Ohio attorney general Richard Corday as director of the CFPB, Senate Republicans like Richard Shelby, R-Ala., ranking member on the Senate Banking Committee, are still adamant about blocking any director nominations until “weakening changes” are made to the CFPB’s structure, funding and independence.
The CFPB’s funding is also under attack, as appropriations legislation on the House floor would require taxpayer funding of the CFPB and reduce the CFPB’s fiscal year 2012 budget to $200 million, a reduction of almost 50%, CFA says.
The CFA report also notes that the full House is scheduled to hold a vote on Thursday on H.R. 1315, the Consumer Financial Protection Safety and Soundness Improvement Act of 2011, which would increase the power of other financial regulators to block CFPB’s consumer protection measures, “ensuring that bank-friendly regulators have an easy excuse when they want to stop the CFPB from curbing abusive but lucrative financial practices.”
This legislation would also alter the CFPB’s leadership structure from a single director to a five-member commission, which, CFA says, “could drive the CFPB decision-making process toward gridlock and inaction.”