More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The reregulation of financial advisors under the Dodd-Frank Act entered a new phase with last Thursday’s release of a draft SRO bill by the Honorable Spencer Bachus, chairman of the House Committee on Financial Services, and the announcement of hearings on that draft legislation scheduled for Tuesday.
Unfortunately, in his bill—called The Investment Adviser Oversight Act of 2011—Rep. Bachus (R-AL) has chosen to ignore the consumer-protecting Dodd-Frank directive to create a fiduciary standard for brokers, and focus instead on securities industry turf-protecting clause to “harmonize” broker and advisor regulation. The good news is that the Republican schizophrenia to protect small businesses from government regulation, while at the same time increasing investment advisor regulation, may just offer enough of an opening to allow for the survival of independent financial advice.
To help me sort out the proposed Adviser Oversight Act, I called Kristina Fausti, director of legal and regulatory affairs at fi360, and as a former staff attorney at the SEC, provides invaluable insight into the workings in Washington, D.C. Kristina pointed out that the good news and bad news about Bachus’ draft bill is that it is largely modeled on the portion of the Securities and Exchange Act of 1934 which authorized the creation of an SRO for the brokerage industry (a role filled by the NASD, the predecessor of FINRA). “While I’d prefer to see the SEC continue to regulate RIAs,” she said, “the good news is that the regulatory model in the Exchange Act is one we already know and understand.”
The bad news is that the NASD/FINRA model is designed for regulating brokerage firms, which perform multiple functions including underwriting, trading and, most important, retail sales of securities. This model is built around rules governing fair dealing between two equal parties in a commercial sales transaction. And it differs substantially from investment advisory relationships regulated under the Investment Advisers Act of 1940, which provides for consumer-protecting standards of conduct for professional advisors who, with greater knowledge and experience, have a substantial advantage over their clients.
Judging from the contents of his draft bill, it appears that Chairman Bachus and possibly other members of his committee are unaware of these differences between the existing regulations of brokers and investment advisors. For instance, the proposed Act calls for an advisor SRO to provide “periodic examinations of its members… …to determine compliance with the applicable provisions of this title, the rules and regulations thereunder, and the rules of the association…” and to “establish appropriate procedures to discipline its members… …for violations of the provisions of this title or the rules and regulations hereunder, and the rules of the association.”
Is it just me, or does this sound a lot more like rules-based FINRA regulation than standards-based RIA regulation? If so, that’s a problem for independent advisors, who operate exclusively as small businesses, which lack even a portion of the resources necessary to comply with a FINRA-like regulatory bureaucracy. In fact, it could be the death knell for the whole independent advisory industry.
But as I mentioned, the Adviser Act also includes some language that could just save the day. The
draft also calls for SRO rules that “…do not impose any burden on the business of investment advisers or their ability to compete in the market for financial services…” The 64-cent question is this : How serious are the Republicans about protecting small businesses, such as independent advisory firms, from punitive regulations? If they are serious, it seems as if any new investment advisor regulation should involve the same type of cost/benefit analysis that SIFMA and Bachus’ House committee have requested for a broker fiduciary standard. And the independent advisory community should be able to use the clearly adverse economic consequences of FINRA-style regulation to save their industry.