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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Last week, I made my way up to Capitol Hill to testify at a hearing before the House Subcommittee on Capital Markets on a draft bill which, if enacted would have dramatic consequences for all advisory firms. The hearing was entitled, “Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight.” The other witnesses at the hearing included the CEO of FINRA, representatives of two broker-dealer organizations and two insurance organizations, the North American Securities Administrators Association (representing state securities regulators), and the Consumer Federation of America. For those interested in the details, you can view the archived hearing at the House Subcommittee’s website.
Before the hearing, Rep. Spencer Bachus (R-Ala.), the powerful chairman of the powerful House Financial Services Committee, had floated draft legislation, called the “Investment Adviser Oversight Act of 2011,” for discussion at the September 13 hearing. While some details of the Bachus draft are subject to interpretation, here is the basic outline:
- Most of the 28-page draft largely mirrors the Maloney Act—the law passed in 1938 that led to the founding of the NASD in 1939—except that it applies to investment advisers instead of broker-dealers. The draft empowers the SEC to register a “national investment adviser association.” Such an organization would have broad rulemaking, inspection and enforcement authority of most investment advisers. The SEC could register more than one “national investment adviser association.”
- The Bachus draft requires the following investment advisors to be members of a national investment advisor association: (1) all dual registrants; (2) all state-registered investment advisors, and (3) all SEC-registered investment advisors, except for investment advisors that have AUM 90% or more of which are attributable to mutual funds, hedge funds, private equity funds, or whose clients have a minimum of $25 million in investments.
The thrust of the draft is clear: to establish an organization similar to FINRA for the vast majority of investment advisory firms. A relatively small number of firms would remain under the SEC’s auspices (primarily large mutual fund companies, private fund advisors, and other “institutional” firms), as well as their affiliates under certain circumstances. But all other investment advisory firms would be required to belong to a private regulator approved by the SEC.
During the hearing, I stressed our organization’s opposition to the draft legislation. I noted the drawbacks of private regulation and specifically expressed concerns that have been voiced about FINRA, including its lack of accountability and transparency, the costs involved, its track record and its bias favoring the broker-dealer model of regulation. As an alternative, I suggested that the Subcommittee consider legislation authorizing appropriate investment advisor user fees to enhance the SEC’s examination program.
It appears likely that Chairman Bachus will formally introduce legislation similar to his draft proposal in the near future. Reading the tea leaves, he likely will have enough support to move such a bill through the House Financial Services Committee. The Senate prognosis certainly is more uncertain. But for those who believe that private regulation of the investment advisory profession is undesirable, it is time to express your concerns to members of Congress.
As always, I welcome your thoughts and feedback.