More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
Just days after House Financial Services Chairman Spencer Bachus, R-Ala., introduced draft legislation calling for one or more self-regulatory organizations (SROs) for advisors, Rick Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA), told lawmakers at a Tuesday hearing to discuss the draft bill that FINRA stands ready to take on that role.
In testimony before the House Financial Services Capital Markets Subcommittee, Ketchum (left) said that FINRA, as the advisor SRO, would establish “a separate entity with separate board and committee governance to oversee any advisor work, and would plan to hire additional staff with expertise and leadership in the adviser area.” What’s more, he pledged, “if FINRA becomes an SRO for investment advisers, we would implement regulatory oversight that is tailored to the particular characteristics of the investment advisor business.”
Ketchum went on to say that given FINRA’s “experience in operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem."
Indeed, William Dwyer, chairman of the Financial Services Institute (FSI) and president of national sales and marketing at LPL Financial Services, told lawmakers on Tuesday that they should “quickly pass legislation to approve an SRO for advisors,” and that the SRO should be FINRA.
David Tittsworth (left), executive director of the Investment Adviser Association in Washington (IAA), however, stated IAA’s “strong” opposition to an SRO for the advisory profession—particularly FINRA—as “substantial drawbacks to an SRO outweigh any potential benefits.” These drawbacks, he said, include “insufficient transparency, accountability, and oversight by the SEC and Congress, due process issues in disciplinary proceedings, and the absence of any requirement for a cost-benefit analysis for proposed rules.”
Tittsworth told members of the subcommittee that IAA would assist the subcommittee in drafting, as an alternative to an SRO, legislation calling for properly structured user fees. Tittsworth said such a bill should include provisions that: (1) specifically preclude any investment advisor SRO if such fees are imposed; (2) clarify that such user fees will be dedicated to an increased level of investment advisor examinations (instead of simply being used as substitute funding for the existing level of examinations); and (3) set forth specific reporting requirements and review of any such user fees by Congress and the public.
Rep. Scott Garrett, R-N.J., chairman of the subcommittee, said during the hearing that an SRO is needed for advisors because the SEC “has a lot on its plate—some would argue too much,” and that shifting oversight of advisors from the SEC to an SRO is necessary as exams of advisory firms are “not getting done.” That’s where FINRA’s stable of 1,000 examiners could help, added LPL’s Dwyer.
Bachus added that if lawmakers are able to come to a "bipartisan agreement" on an SRO "there would have to be protection for state regulators and enhanced oversight over FINRA."
When asked by Bachus (left) if FINRA would be willing to accept enhanced oversight by the SEC, Ketchum replied: "Yes we would."
Dwyer also noted that while the SEC and self-regulatory organizations currently examine “more than half of the nation’s approximately 4,900 registered broker-dealer firms at least once a year, the SEC projects it will examine fewer than 10% of the more than 11,000 federally registered investment adviser firms during the fiscal years 2009 and 2010. The percentage of advisors audited is expected to fall to 7% in 2011.”
Garrett also challenged the SEC’s decision to move forward with crafting a fiduciary standard for brokers without offering any cost/benefit analysis to support such a rule.
Tittsworth said in response that the SEC will have to submit a cost/benefit analysis on any fiduciary duty rule it promulgates, and that the “SEC can be taken to court if [the agency’s] cost/benefit analysis is not robust enough.”
Dwyer, along with lawmakers and others who testified voiced deep concerns with the Department of Labor’s (DOL) controversial rule amending the definition of fiduciary. Dwyer told lawmakers that the “DOL should withdraw and repropose its fiduciary proposal,” while Barbara Roper, director of investor protection for the Consumer Federation of America, said the federation has “very significant concerns about DOL’s proposal.”