More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- 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.
It’s been a big week for news on the advisory reregulation front—and most of it is bad. First, in her testimony before the House Financial Services Committee last Wednesday, SEC Chairman Mary Schapiro announced her support for an investment advisor SRO, as described in Committee Chairman Spencer Bachus’ draft legislation called the “Investment Adviser Oversight Act of 2011.” In response to her remarks, Chairman Bachus, R-Ala., hinted at a potential about-face on additional funding for the SEC, stating that his Committee’s reluctance to increase the Commission’s budget had been based on restructuring the SEC, presumably such as the handing off of RIA regulation that Ms. Schapiro appeared be suggesting. I realize that Santa Fe is a long way from the Beltway, but from out here, that conversation sure looks a lot like a deal in the making—one that would make an RIA SRO a whole lot more likely.
Then, Monday, media reports (specifically, Investment News’ Mark Schoeff Jr.) were circulating that a high-ranking SEC staffer revealed that new regs applying a fiduciary standard for brokers is extremely unlikely to come out this year, due to Congress’s mandate that the Commission more thoroughly study the costs vs. benefits of changing current broker regulations. With the political uncertainty in Washington these days, that puts a new broker standard on a very shaky back burner, which leaves the very real possibility that RIAs may end up with “harmonized” regulations, but no level playing field as a quid pro quo.
And finally, the worst news of the lot come out Monday, when the Department of Labor announced that amid tremendous Congressional and industry pressure to reconsider vaguely articulated—but allegedly “dire”—consequences of expanding consumer protections under ERISA, Phyllis Borzi at the Employee Benefit Security Administration announced that the DOL was reconsidering its new regulations, which among other things would expand the fiduciary duty under ERISA to cover IRA accounts. This is particularly bad news for proponents of a broker fiduciary standard, as the EBSA’s proposed regs were seen as a test case of Washington’s political will to resist the influence of the financial services industry, and enact stiffer investor protections.
Now, the DOL’s proposed regs will offer a test case of how the cost-benefit analysis of a fiduciary standard should be conducted. At issue is whether the true costs to consumers will be included, to counter-balance the financial services industry’s claims of addition costs to its firms. “The imperative of removing excessive costs off investors must remain the priority over removing normal regulatory costs off regulated firms,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “The most worrisome costs in the current system are excessive fees, conflicts of interests, and inappropriate retirement products. The Institute for the Fiduciary Standard also urges Assistant Secretary Phyllis C. Borzi to further review the true costs and benefits of extending the fiduciary standard to plan participants and beneficiaries.”
As long as only the costs of implementing a fiduciary standard are studied by either the DOL or the SEC, any cost-benefit analysis will be hopelessly skewed. Protecting the investing public, which is the mandate of both departments, can only be achieved by accurately calculating the true costs of the current regulatory schemes to investors, in the form of excessive fees, underperforming holdings and hidden investment risk.