More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
As we hit the one-year mark on passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, some aspects of the law have suffered a setback in implementation while others have yet to take shape. For advisors, four issues will take the spotlight as the Dodd-Frank reform law enters its second year—fiduciary duty, a self-regulatory organization (SRO) for advisors, harmonization of advisor and brokers rules, and adequate funding for the Securities and Exchange Commission (SEC).
While Republican members of Congress over the past year have tried to stall the law's implementation and modify provisions of Dodd-Frank, a newly released poll by Lake Research Partners and sponsored by the AARP, the Center for Responsible Lending and Americans for Financial Reform, found that the majority of Americans—be they Republican, Democrat, or Independent—favor “strong , sensible oversight of the financial services industry.” By a 3 to 1 margin, the survey says, “Americans want financial firms held accountable and financial reforms to take place as soon as possible.” The question facing regulators and Congress, and over which all sorts of advocacy groups would differ, is exactly how to do that.
All eyes will be on the SEC as it launches into writing a rule to ensure all advice givers, including brokers, adhere to a fiduciary standard of care. SEC Chairman Mary Schapiro (left) has pledged that the agency will begin crafting the rule after today, the date marking the one-year anniversary of Dodd-Frank.
Will the SEC write a fiduciary rule that largely focuses on disclosure? John Taft, CEO of RBC Wealth Management and chairman of the Securities Industry Financial Markets Association (SIFMA) said recently that “A new [fiduciary] standard is what’s needed. Rules that don’t exist today need to be written to understand how to apply that fiduciary standard to brokerage activities—which are many, varied and almost impossible to describe.”
Dodd-Frank’s co-author, Rep. Barney Frank, D-Mass., also warned Schapiro recently that as the agency writes a fiduciary duty rule for brokers, it should not “simply copy” the ’40 Act standard for advisors. While Section 913 of Dodd-Frank gives the SEC the authority to establish a new fiduciary standard of care for broker-dealers, “the requirement that the new standard be ‘no less stringent’ …was not intended to encourage the SEC to impose the Investment Advisers Act standard on broker-dealers, but to ensure the new standard would not be a ‘watered down’ version of the investment advisors’ fiduciary standard,” Frank said.
In creating a fiduciary standard for brokers, the SEC will have to grapple with a number of “thorny provisions” in Dodd-Frank, David Tittsworth (left), executive director of the Investment Adviser Association (IAA) in Washington, told AdvisorOne in a recent interview. First, he says, Section 913 of Dodd-Frank applies when a broker is providing “personalized investment advice” to “retail customers,” he said. “What do these terms mean?” he asked. Section 913 also states that the SEC may extend the fiduciary duty to “other customers,” Tittsworth says. “Will the SEC exercise this authority or will [the Commission] only deal with ‘retail’ customers?” he wonders.
While details surrounding a fiduciary duty rule remain unclear, it's likely the SEC will issue a proposed rule by year-end.
Mark Casady (left), president and CEO of LPL Financial, told AdvisorOne in a recent interview that putting brokers under a fiduciary standard “doesn’t go far enough” in leveling the “uneven” playing field that exists for brokers and advisors.
If brokers are to be held to a fiduciary standard, then it’s only fair to “harmonize” the rules for RIAs and brokers, Casady said. The SEC should ensure RIAs adhere to capital, insurance and CE requirements “as a way of making sure the consumer is assured” the same standards are being applied along with a fiduciary requirement. Of course, he adds, harmonizing the standards “doesn’t mean that everything that needs to happen to a broker needs to happen to an advisor because you have a very different mechanism for compensation.”
But SEC Commissioner Luis Aguilar has stated publicly that he’s not in favor of “harmonization for harmonization's sake.” Douglas Scheidt, associate director and chief counsel in the SEC’s Office of Investment Management, said recently that he believes the SEC will hold off on issuing a rule on the overall harmonization of advisor and broker rules. Scheidt said that harmonization of advisor and broker rules, “poses a lot of difficult issues that perhaps over time will be worked out.”
Self-Regulatory Organization (SRO)
The next natural step after harmonizing fiduciary duty and rules that apply to brokers and RIAs, said Casady, is to “harmonize oversight [of advisors and brokers] and create an SRO for RIAs.”
Indeed, Section 914 of Dodd-Frank directed the SEC to study the feasibility of an SRO for advisors, and while most advisory groups favor user fees to fund advisor exams, the Consumer Federation of America (CFA) recently reversed its opposition to an SRO for advisors because it has become frustrated with the lack of funding awarded to the SEC.
“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," AdvisorOne's July 14 article reported, "we have been forced to reassess our opposition to the SRO approach,”
Marilyn Mohrman-Gillis (left), managing director, public policy for the CFP Board, says that the House Financial Services Subcommittee on Capital Markets plans to hold a hearing in September on not only fiduciary duty but also the SRO issue.
Dale Brown, president of the Financial Services Institute (FSI), argues that “a big first step” toward the goal of “harmonized, effective regulation” under Dodd-Frank would be a “the adoption of a uniform fiduciary standard of care” for brokers and advisors and the creation of an SRO for advisors.
The question remains as to whether the SEC will see a further budget boost. As it stands now, the agency was given a budget increase to $1.18 billion for this year, which was “very welcome in light of House efforts to cut the SEC budget still below the $1.3 billion authorized in Dodd-Frank,” CFA noted in its recent progress report on Dodd-Frank.
The House, CFA says, is expected to take up shortly 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.
As Schapiro has told Congress numerous times, adequate funding of the SEC is crucial to the agency being able to police Wall Street.
While Republicans have been reluctant to give the agency more funding, former SEC Chairman Harvey Pitt (left) told AdvisorOne in a recent interview that under its current leadership, “the SEC is doing thousands of things right every day.” Congress, he said, “must decide whether it wants the SEC to do all the things it has asked the SEC to do, or whether it simply enjoys criticizing the SEC and making it even more difficult for it to succeed.” Depriving the agency of necessary funding, he continued, “as a supposed punishment for alleged past failures is counter-intuitive, counter-productive and contrary to the needs of American investors.”
For more on the fiduciary issue and the Dodd-Frank first anniversary, see:
And additional AdvisorOne reporting on the Dodd-Frank anniversary.