More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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.
While all bets are on Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, introducing a bill this fall to require one or more self-regulatory organizations (SROs) for advisors, it’s important to note that any SRO bill that’s introduced—and eventually passed—in the House must be approved by the Democratically controlled Senate Banking Committee.
And it looks as though Senate Banking Committee Chairman Tim Johnson, D-S.D., may not be ready to approve the SRO route just yet. As a Senate banking committee spokesperson told me on Tuesday, Johnson believes the SRO issue “deserves further exploration before moving forward with any legislative proposals.”
Investment advisor regulation was raised during a hearing on investor protection issues held by the Senate Banking Committee in July, but Johnson’s committee has yet to announce when, or if, a specific hearing would be held on the SEC’s study regarding putting brokers under a fiduciary mandate or an SRO for advisors.
During an interview with AdvisorOne in May, Johnson noted that the SEC’s report under Section 914 of Dodd-Frank regarding an SRO for advisors “raised a number of important concerns.” While admitting that “conclusions either way at this point would be premature” as to whether an SRO is needed for advisors, the Senator promised that he would “be monitoring this issue carefully.”
Senator Johnson has been a staunch advocate for more SEC funding, but Bachus just warmed up to idea last week—mainly because he sees that more funding would help the SEC with its oversight of any advisor SRO. During comments at the Sept. 15 hearing he held on SEC restructuring, Bachus specifically asked a question about the significant duties related to SEC oversight of SROs.
Says Kristina Fausti, general counsel with fi360: Bachus “understands that funding [for the SEC] might be needed to assist with oversight of any advisor SRO and therefore he could continue down a path of introducing his SRO bill while also making sure that the SEC gets the funding it needs to properly oversee the SRO.”
A lot of the focus at the hearing was on providing funds to help the SEC modernize its outdated technology, “so it is not clear that the agency would get the funding it needs to enhance the number of advisor exams it performs,” says Fausti, who’s a former SEC attorney. And even if the agency did get enough funding to cover advisor exams, “I don’t believe that an SRO would be totally ruled out.”
SEC Chairman Mary Schapiro also admitted for the first time publicly at the Sept. 15 hearing that an SRO for advisors must be “very seriously” considered. “Schapiro recognizes that funding is not a cure-all and that there may be restrictions that come with more funding, so all viable alternatives need to be considered,” Fausti says. Also, as the former head of NASD and then FINRA, “Schapiro also clearly understands the SRO structure and believes that it can be an effective oversight mechanism.”
As for whether the SEC will move forward with a proposed rule by year-end putting brokers under a fiduciary mandate, Schapiro signaled at the hearing that the agency is still meeting with industry officials and “others” as well as having the agency’s economists work on a further cost-benefit analysis of such a rule “to help inform this discussion.” Said Schapiro: “We have not yet proposed to go forward with a specific [fiduciary] rule at this time.”
The SEC still lists under its upcoming activities under Dodd-Frank for August- December, “proposed rules, as may be appropriate, based on Section 913 study conducted on the obligations of brokers, dealers and investment advisers”—that is, fiduciary duty.
As the recent U.S. Court of Appeals for the D.C. Circuit decision that struck down the SEC’s rule granting proxy access rights because the agency failed to consider the economic impact of the rule shows, “any SEC rulemaking in the fiduciary area that seriously affects broker-dealers’ business models without conducting an in-depth and comprehensive cost-benefit analysis will likely be challenged in court, and the challenge will have reasonable likelihood of success,” says Mark Perlow, partner in the investment management practice area for the law firm K&L Gates.