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.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
To hear Duane Thompson tell it, now that the Republicans have control of the House of Representatives, a bill authorizing a self-regulatory organization for investment advisors any time soon is unlikely. As the senior policy analyst at fi360 and president of Potomac Strategies LLC, a legislative and media relations consulting firm in Washington, D.C., recently told me (see my Aug. 16 blog on AdvisorOne.com): “I’m not sure we’ll get something this year, or even next year. And then, there’s the 2012 elections, which could change the whole landscape.”
This is good news in the minds of many independent RIAs, who fear the all-too-real specter of FINRA assuming the role of regulator of all registered investment advisors—with its cost and draconian bureaucracy driving up the already increasing cost of doing business. But even with an SRO on the shelf for the time being, that still leaves the issues of a fiduciary standard for brokers and the related “harmonization” of broker and RIA regulation. Congressional action on these issues appears less likely as well, due to a lack of enthusiasm for the fiduciary standard by House Republicans. Or at least, that’s what I would have thought, had I not read the July 14 comment letter to the SEC by the Securities Industry and Financial Markets Association.
SIFMA’s comment letter is a curious document, both in its uncharacteristically defensive tone, and its hand-wringing concern over the possibility that the SEC will act to remedy the broker fiduciary standard issue (as instructed under Dodd-Frank) by simply recommending the elimination of the “broker exemption” to the Investment Adviser Act of 1940. What’s more, in its apparent scrambling to concoct a viable alternative to dropping the exemption, SIFMA’s suggestions lack the usual polish and seeming common sense of its typical position papers, culminating in stretching the definition of “harmonization” to Clintonesque proportions (“It depends on what the definition of ‘is’ is…”) and invoking a defense of “separate but equal” standards.
To my mind, eliminating the broker exemption has always been the simplest and most direct way to implement a fiduciary duty for brokers by removing brokers who offer personal investment advice from a regulatory framework that doesn’t work to protect consumers, and placing them into one that does. Yet, I’ve also been of the opinion, as have all the observers with whom I’ve talked, that this solution was as dead as Tiger Wood’s golf game. But with it’s massive Washington lobbying staff and close ties to FINRA and the SEC, SIFMA undoubtedly has a solid basis for its concerns—which can only mean good news for a genuine and uniform fiduciary standard.
The comment letter leaves little doubt that the securities industry is genuinely concerned: “Our members are also concerned that the SEC could take the unnecessarily narrow view that, because Section 913 of the Dodd-Frank Act requires that the uniform fiduciary standard be ‘no less stringent than’ the general fiduciary duty implied under Section 206 of the Advisers Act, the SEC’s latitude and ability to establish a separate, unique uniform fiduciary standard is limited. […] We believe that a wholesale extension to broker-dealers of the general fiduciary duty implied under the Advisers Act is not in the best interests of investors and is problematic for the broker-dealer business model.”
Particularly troubling is what SIFMA feels should not be included under the definition of “personalized investment advice”:
• “Providing general research and strategy literature”
• “Discussing general investment and allocation strategies”
• “General marketing and education materials that are not specific to a customer”
• “Financial planning tools and calculators that use customer information but do not recommend specific securities”
• “Account and customer relationship maintenance (e.g., periodic contact to remind customers to rebalance assets to match allocations previously established, absent efforts to recommend changes to the allocation percentages”
• “Needs analysis (e.g., meetings to determine customers’ current and any new investment objectives and financial needs)”
• “Referring customers to affiliated or third-party providers of financial or financial-related services”
It’s surprising, even to me, that SIFMA has blatantly excluded virtually every possible avenue of delivering investment advice to customers from falling under a fiduciary standard, with the sole exception of the actual point of sale of a security. These are not helpful, consumer-oriented suggestions: They are the same old FINRA standards, not even thinly disguised, which are designed to provide selling guidelines and to protect brokerage business lines.
I suspect the reason for suggesting such transparently business-as-usual “rules” for a broker “fiduciary standard” is that they are part and parcel of the most mind-boggling aspect of SIFMA’s letter: namely, that “harmonizing” broker and RIA regulation can be achieved under separate but equal regulatory regimes.
“Throughout the legislative process and debate that preceded the enactment of the Dodd-Frank Act, SIFMA has supported the development of a uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers,” states the SIFMA letter, which goes on to detail how current RIA regulation should be modified to resemble the FINRA bureaucratic approach:
“SIFMA also generally supports the [SEC’s Study on Investment Advisers and Broker-Dealers] recommendation that the SEC consider harmonizing other areas of broker-dealer and investment adviser regulation, including advertising, the use of finders and solicitors, supervisory requirements, licensing and registration of firms and associated persons, and books and records, among others.”
But when it comes to applying the already well-established fiduciary standard that RIAs have been operating quite successfully under for the past 70 years, it seems to depend on what the definition of “uniform” is: “The [SEC’s Study …] does not, however, specify that the contemplated uniform fiduciary standard of conduct for broker-dealers and investment advisers should be separate and distinct from the general fiduciary duty implied under Section 206 of the Advisers Act. Instead, the Study raised the serious concern among our member firms that the SEC may be contemplating an “overlay” on broker-dealers of the existing Advisers Act standard. SIFMA strongly opposes imposing on broker-dealers the existing Advisers Act standard together with its associated case law, guidance, and other legal precedent.”
I suppose in its defense, it’s only fair to point out that SIFMA was for the harmonization of broker and advisor regulation before it was against it. Yet, the notion that “separate but equal” standards for brokers and advisors is either in the “consumer’s best interests” or in compliance of the SEC’s mandate under the Dodd-Frank Act is bizarre, even for the securities industry. Instead, it’s an embarrassingly transparent attempt to lay the groundwork for a broker fiduciary standard that is a substantially watered down version of the investment advisor’s standard, under the guise of recognizing the differences in business models and cost structures of broker and advisors.
Yet despite these obfuscations, SIFMA’s recommendations clearly fall far short of achieving the goals set out in the Obama administration’s original white paper, and the subsequent Dodd-Frank Act: ending investor confusion over the legal duties of advisors vs. brokers, and raising the standards for brokers to the same level that consumers enjoy from their investment advisors. As former Supreme Court Justice Thurgood Marshall successfully argued as an ACLU attorney in the landmark Brown v. Board of Education case in 1954: “Separate is never equal.”