More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
House Financial Services Committee Chairman Spencer Bachus, R-Ala., says he is drafting legislation to restructure the Securities and Exchange Commission.
“The SEC is structurally flawed and suffers from operational inefficiencies and organizational incoherence,” said Bachus in a release on Tuesday announcing the legislation. The legislation, to be called the SEC Modernization Act, "will be a comprehensive restructuring of the SEC. It will make the SEC more efficient, consolidate duplicative offices, enable the agency to use better technology, and strengthen ethical safeguards to avoid conflicts of interest.”
The structure of the SEC “is the main problem,” Bachus said, “and over the years Congress has only increased its dysfunctional structure through fragmentary and piecemeal amendments rather than the comprehensive reform that is needed.”
The legislation will also implement reforms recommended by the SEC’s Inspector General, the Government Accountability Office and the Boston Consulting Group report mandated by the Dodd-Frank Act.
Bachus said in the release that throwing more funds at the SEC will not resolve the agency's problems. He noted that “the SEC’s budget this year is at $1.185 billion, up 6% over 2010—and nearly triple what it was a decade ago.
“Simply providing yet more funding to the SEC without first correcting its flaws will do nothing but prolong these inefficiencies and structural failures,” he said. “Without fundamental reform, there will never be any real improvement to the SEC’s operations.”
The full House Financial Services Committee was scheduled to hold a hearing on Thursday regarding the SEC called “Fixing the Watchdog,” but that hearing has been postponed and will likely be rescheduled once Congress returns from its August recess.
David Tittsworth (left), executive director of the Investment Adviser Association (IAA) in Washington, says that it’s likely that Bachus’ modernization legislation along with Rep. Scott Garrett’s bill (H.R.2308), the SEC Regulatory Accountability Act, requiring the agency to perform enhanced cost/benefit analyses on its rules, will be “front and center when they reschedule their hearing with [SEC] Chairman [Mary] Schapiro after the August recess.”
Bachus’ legislation proposes to make the following changes to the SEC:
Consolidation of Duplicative Offices
- Amend Dodd-Frank Act Section 965 to consolidate the SEC Office of Compliance, Inspections, and Examinations (OCIE) and its employees into the Divisions of Trading and Markets (TM) and Division of Investment Management (IM). A new Office of Compliance, Inspections, and Examinations would be created within the TM and IM divisions to house all examination, inspection, and compliance staff. Each new office would have a deputy director who would report to his or her respective division director. The SEC’s regional offices will report to the Division of Enforcement, the Division of Investment Management, and the Division of Trading and Markets.
- Amend Dodd-Frank Section 965 to consolidate the Division of Risk, Strategy and Innovation and its employees into the Divisions of Corporation Finance, Enforcement, Investment Management and Trading and Markets. A new Office of Risk, Strategy and Innovation would be created within the four remaining SEC divisions. Each office would have a deputy director who would report to their respective division director.
- Decouple the SEC’s chief economist and the Division of Risk, Strategy and Innovation since the legislation eliminates this Division. The chief economist would report to the SEC chairman.
- Amend Dodd-Frank Section 342 to consolidate the pre-existing SEC Office of Equal Employment Opportunity into the newly established Office of Minority and Women Inclusion. The Office of Equal Employment Opportunity will have a deputy director who reports to the director of the Office of Minority and Women Inclusion.
- Amend Dodd-Frank Section 915 to consolidate the Office of the Investor Advocate as established by the act and integrate its functions into the preexisting SEC Office of Investor Education and Advocacy. The investor advocate would be a deputy director who reports to the director of the Office of Investor Education and Advocacy.
Managerial and Ethics Reforms
- Combine the functions of the existing SEC Executive Director (ED) into the functions and role of the existing SEC Chief Operating Officer.
- In light of recent questionable ethics guidance, the SEC Office of Ethics Counsel shall memorialize guidance provided to all SEC employees. Those records and memos shall be made available to the SEC Inspector General if an investigation so demands.
- Not later than Jan. 31 of every calendar year, the SEC Chairman shall submit in writing the agency’s agenda for that year to the House Committee on Financial Services and the Senate Banking Committee.
- Codify that the SEC Inspector General is an independent office within the Commission that reports directly to the Chairman.
- The Office of the Chairman will expand to be composed of the COO, the Office of General Counsel, the Secretary, and the Chief Accountant. Also, the Offices of International Affairs, Legislative and Inter-Governmental Affairs, and Public Affairs will be consolidated into a new Office of External Affairs. External Affairs will also be housed within the Office of the Chairman.
- The following SEC offices shall report to the COO: Office of Acquisitions; Office of Administrative Services; Office of Financial Management; Office of FOIA, Records Management, and Security; Office of Human Resources Office of Information Technology; Office of Interactive Disclosure; Office of the Administrative Law Judges.
- To avoid potential conflicts of interest within the commission after employees leave employment, the SEC Office of Ethics Counsel shall develop a system of documenting employee recusals. To accomplish this goal, the SEC shall establish a database to document recusals and to identify potential conflicts of interest by documenting matters for which the employee was personally and substantially involved while an SEC employee. This issue of the “revolving door” between Wall Street firms and former SEC employees was recently highlighted in a New York Times article.
- Although the Dodd-Frank Conference Committee adopted an amendment offered by Subcommittee Chairman Garrett to create an independent SEC Ombudsman in Section 919D, this provision was inexplicably altered by the Senate Conferees to have this new ombudsman report to the Office of the Investor Advocate, which negates the entire function of an ombudsman to interact with market participants without fear of reprisal by SEC staff. The legislation would restore the Garrett amendment and establish the ombudsman as an independent office reporting directly to the SEC Chairman. As Dodd-Frank confers new prudential regulatory authorities to the SEC, the SEC needs to emulate the prudential regulators and have an independent ombudsman to receive complaints and questions from regulated entities.
Dodd-Frank Section 991 authorized a $100 million reserve fund funded by SEC fees for use by the SEC “as the Commission determines necessary.” The legislation would amend this section to allow the SEC to only use this reserve fund to make badly needed agency technology improvements.