More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Increased funding for the Securities and Exchange Commission is likely on its way. After repeated pleas by SEC Chairman Mary Schapiro that the agency get a funding boost to handle the deluge of new responsibilities under Dodd-Frank, Republican lawmakers who’ve sought to curtail funding for the agency are changing their minds.
Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, said during a hearing on Thursday to examine ways to reform the SEC, that “my personal view is that an increase in funding is necessary as part of the reform process.”
During her remarks at the hearing, which was called "Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission,” Schapiro reiterated her stance that the SEC “cannot operationalize the Dodd-Frank rules without additional resources.”
Schapiro also said that even though the agency is looking for ways to be more efficient, as recommended by the Boston Consulting Group, because the SEC must now take on oversight of derivatives and hedge funds, “without additional resources even if [the agency] becomes more efficient, at the end of the day there is a gap.”
In July, Republican House appropriators approved a bill that would maintain the SEC’s current budget level of $1.185 billion. Schapiro said that appropriation would not be sufficient for the SEC to do its job. On Wednesday, the Senate Appropriations Committee, under the FY12 Financial Services & General Govt. Appropriations Bill, approved appropriations of $1.407 billion for the SEC, an increase of $222 million (19%) above the FY11 enacted level.
Schapiro also told members of the House Financial Services Committee that she has “significant concerns” about the two bills put forth by the two leading House Republicans on the committee regarding reforming the SEC, and that, in lieu of more funding for the agency, a self-regulatory organization (SRO) for advisors must be “very seriously” considered.
Besides delving into SEC reforms recommended by the Boston Consulting Group, the hearing focused on bills introduced by Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Capital Markets Subcommittee, and full committee chairman Bachus.
Garrett’s bill, the SEC Regulatory Accountability Act (H.R. 2308), would require the SEC to perform enhanced cost/benefit analyses on its rules—even before the rules were proposed, as noted during the hearing by Rep. Barney Frank, D-Mass., ranking member on the committee.
Even Bachus acknowledged that offering a cost/benefit analysis before proposing a rule “would be tough to do.” Said Bachus: “We have to revise that.”
Frank also pointed out that Garrett’s bill would not only cover cost/benefit analyses for regulations, but also for enforcement orders, which he said is “quite odd.” Schapiro said in response: “Yes, [this bill] would be very damaging to the [SEC’s] enforcement division.”
Kristia Fausti, general counsel for fi360, and a former SEC attorney, told AdvisorOne that with Garrett’s bill regarding SEC cost-benefit analysis for rules and the Bachus discussion draft regarding SEC reorganization, called the SEC Modernization Act, “Congress risks over-legislating reform efforts and creating unintended consequences that could hamper the SEC’s mission of promoting investor protection, capital formation, and fair and efficient markets.”
As those testifying before the committee stated, the proposed pieces of legislation, she says, would likely result in “greater burdens being created for the SEC at a time when greater efficiency is needed.”
In response to a question about her support for an SRO for advisors, Schapiro replied that “we can all agree that examining 9% of advisors per year is not sufficient.” Unless the SEC receives sufficient funding, “we have to look very seriously at an SRO.”
So the question remains, if the SEC gets a funding boost, will it be enough to thwart an advisor SRO? "Unfortunately, SEC funding and an SRO for advisors are not necessarily mutually exclusive," says Fausti with fi360. "It became clear during the hearing that any increase in funding would be coupled with reform of the agency and that Congress likely would give general guidance on how funding should be used. It appears that a major area that would get funding is technology, so it is not clear that the agency would get the funding it needs to enhance the number of advisor exams it performs."