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.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
On the one-year anniversary of the Dodd-Frank Wall Street Reform Act, signed into law on July 21, 2010, let’s take a step back and review where we are vis-à-vis the reregulation of financial advisors. Although we don’t have nearly as much certainty about what the advisory industry will eventually look like as we hoped 12 months ago, happily, we do know (or can reasonably infer) quite a bit.
Fiduciary Standard & Harmonization
For instance, based on comments from parties on all sides of the issue, it seems very likely that we will have a “fiduciary standard” for brokers—however, what that standard will look like, and whether it will bear any resemblance to the duty of care that the clients of RIAs currently enjoy under the ‘40s Act is still up in the air.
We do know, if the latest SEC statements are to be believed, that any new standard for brokers will not be linked to efforts to “harmonize” the regulation of brokers and RIAs: a thorny issue that will apparently be left for another time. This is temporarily good news for RIAs, who have benefited from the standards-based oversight of the SEC and the courts. But long term, it may not bode well, as “harmonization” discussions so far have tended to suggest a far more burdensome “rules-based” system, such as FINRA currently uses for brokers.
Prospects for an SRO for Advisors
Perhaps the most unexpected development since the passing of Dodd-Frank is the possibility of a self-regulatory organization (SRO) for investment advisors, which among many other benefits would have the potential to avoid a rules-based bureaucratic and financial nightmare. At first, it appeared that the task of administering new RIA regulations would either continue to fall on the SEC, or be shifted to a more-than-willing FINRA (an outcome that by my reckoning, few observers, and even fewer RIAs, support). But when the prospect of additional funding for the SEC to ramp up its oversight began to dim in Congress, the possibility of a third alternative—an SRO for RIAs—began to emerge.
The first step toward an alternative solution was the announcement by The Business Law Society of its intent to create the Self-Regulatory Organization for Independent Investment Advisors (SROIIA), led by Professor Mercer Bullard and his law students at the University of Mississippi. Once the SEC (or Congress) announces its intention to seek an SRO for RIAs, SROIIA intends to file an application to fill the void for the 34,000 or so independent RIAs (and the 17,000 or so RIA reps employed by them). Starting an SRO from scratch is no simple undertaking, but as an alternative to FINRA oversight, I’d bet most RIAs will be willing to make the effort.
In the wake of subsiding funding to the SEC, the idea of an SRO for RIAs is gaining momentum with consumer groups. On July 14, in a hearing on Dodd-Frank, Barbara Roper, the director of investor protection for the Consumer Federation of America (an organization that represents some 300 “consumer groups” including credit unions, rural electric cooperatives, public power groups and state and local consumer protection agencies.) told the Senate Banking Committee: “Having spent the better part of two decades arguing for various approaches to increase SEC resources for investment adviser oversight with nothing to show for our efforts, we have been forced to reassess our opposition to the SRO approach. Specifically, we have concluded that a properly structured SRO proposal would be a significant improvement over the status quo.”
Unfortunately, when asked, Roper was reluctant to rule out FINRA from among the “significant improvements,” saying: “It would depend on what proposal FINRA puts on the table.” Which brings us to the crux of the SRO issue: Exactly what is meant by “self”? It’s certainly true that most of the B/Ds that FINRA regulates are also RIAs. But an RIA affiliated with a B/D is vastly different in business structure and quality of client care than an independent RIA. This point has apparently eluded the “consumer advocate” Roper, the SEC, FINRA and even the CFP Board (which through its participation in the Financial Planning Coalition opposes a potentially turf-threatening SRO for RIAs).
In fact, the only organization that I’ve seen that addresses the importance of the independence of financial advice is the Business Law Society. Which, at this one-year mark, makes SROIIA the best—and possibly the last—hope for truly independent financial advice under the Dodd-Frank reregulation.
(For more on the SROIIA, see my July column in Investment Advisor.)