More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- 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.
As questions arise about the SEC's ability to fulfill its mandate, and a growing chorus of commentators, legislators and professionals calls for appointment of a self-regulatory organization to oversee registered investment advisors, Rep. Spencer Baucus, R-Ala., chairmanof the House Financial Services Committee, is proposing a less radical solution to the agency’s problems.
Baucus is drafting legislation—the SEC Modernization Act—that would reorganize the Securities and Exchange Commission. "The SEC is structurally flawed and suffers from operational inefficiencies and organizational incoherence,” according to Bachus. “This legislation 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.”
SEC Chairman Mary Schapiro frequently has complained that the agency is unable to fulfill its mandate because of funding issues; but Baucus says more money is not the answer to the agency's problems. "Without fundamental reform, there will never be any real improvement to the SEC's operations," he said.
Rather than decreasing the SEC’s responsibility for RIA examinations or increasing the agency’s budget, the proposed legislation would make the following changes:
- Consolidate duplicative offices at the SEC;
- Implement managerial and ethics reforms at the agency;
- Establish an SEC ombudsman, who would report directly to the STC chairman; and
- Force the SEC to use its $100 million reserve fund to make "badly-needed agency technology improvements."
Under the proposal, all examination, compliance and inspection staff of the Division of Trading and Markets and Division of Investment Management would be housed under new offices of Compliance, Inspections, and Examinations within their respective divisions. The legislation would also consolidate the Office of the Investor Advocate and integrate it into the pre-existing SEC Office of Investor Education and Advocacy.
To reduce conflicts of interest within the commission after employees leave the SEC, the SEC Office of Ethics Counsel would be required to develop a new system for documenting recusals.
After the recent implosion of the markets, establishing confidence in the agency is of utmost importance. Questions about conflicts of interest at the SEC arose shortly after the Bernie Madoff scandal. Madoff investors claimed that the SEC was slow to investigate Madoff that conflicts of interest at the agency hindered the investigation into the Madoff scam.
Regardless of whether there’s any merit to the conflict of interest claims, establishment of a system for detecting and documenting conflicts of interest is essential to re-establish investor confidence in the agency.
Although the SEC Modernization Act is still in a formative stage of development, it likely represents the future of the SEC: A leaner, more efficient agency that is more responsive to investor concerns. Without reform, the SEC is doomed to be stripped of its examination duties and defunded into obsolescence.
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See also The Law Professor's blog at AdvisorFYI.