More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
Lawmakers and industry officials debated the merits in mid-September of whether there should be a self-regulatory organization (SRO) for advisors, and at least one industry official says to expect SRO legislation from the House this fall.
At a hearing to discuss draft legislation introduced by House Financial Services Committee Chairman Spencer Bachus, R-Ala., calling for one or more SROs for advisors, Rick Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA), told lawmakers that FINRA stands ready to take on that role.
Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Capital Markets Subcommittee, which held the hearing, also challenged the SEC’s decision to move forward with crafting a fiduciary standard for brokers without offering adequate cost-benefit analysis to support such a rule. While any rule proposal crafted by the SEC must include an economic analysis that gets issued for public comment, David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, said at the hearing that the “SEC can be taken to court if [the agency’s] cost-benefit analysis is not robust enough.”
Despite fiduciary critics, Securities and Exchange Commission (SEC) Chairman Mary Schapiro is moving ahead with crafting a fiduciary standard for brokers. The SEC lists among its planned activities under Section 913 of the Dodd-Frank Act from August to December “proposed rules, as may be appropriate,” regarding a fiduciary duty for brokers.
Bachus’ draft SRO bill, introduced on Sept. 8, would amend the Investment Advisers Act of 1940 to provide for the registration and oversight of national investment advisor associations, i.e., SROs. The draft states that advisors would have to be members of the SRO, which would report to the SEC. Duane Thompson, senior policy analyst for fi360, says that “it’s a safe bet” that an SRO bill will come out of the House this fall.
In testimony before the Capital Markets Subcommittee, Ketchum said that FINRA, as the advisor SRO, would establish “a separate entity with separate board and committee governance to oversee any adviser work, and would plan to hire additional staff with expertise and leadership in the adviser area.” What’s more, he pledged, “if FINRA becomes an SRO for investment advisers, we would implement regulatory oversight that is tailored to the particular characteristics of the investment adviser business.”
Ketchum went on to say that given FINRA’s “experience in operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem.” While Bachus’ draft bill calls for one or more SROs, the only SRO option discussed at the hearing was FINRA.
Indeed, William Dwyer, chairman of the Financial Services Institute (FSI) and head of sales at LPL Financial Services, told lawmakers at the hearing that they should “quickly pass legislation to approve an SRO for advisors,” and that the SRO should be FINRA.
Tittsworth, however, stated IAA’s “strong” opposition to an SRO for the advisory profession—particularly FINRA—as “substantial drawbacks to an SRO outweigh any potential benefits.” These drawbacks, he said, include “insufficient transparency, accountability, and oversight by the SEC and Congress, due process issues in disciplinary proceedings, and the absence of any requirement for a cost-benefit analysis for proposed rules.”
Tittsworth told members of the Capital Markets Subcommittee that IAA would assist the subcommittee in drafting, as an alternative to an SRO, legislation calling for properly structured user fees. Tittsworth said such a bill should include provisions that: (1) specifically preclude any investment advisor SRO if such fees are imposed; (2) clarify that such user fees will be dedicated to an increased level of investment advisor examinations (instead of simply being used as substitute funding for the existing level of examinations); and (3) set forth specific reporting requirements and review of any such user fees by Congress and the public.
But Rep. Bachus said that user fees are “unworkable” and amount “to an extension of the SEC, which needs reform.”
Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), reiterated CFA’s position at the hearing that while CFA believes adequate funding for the SEC would negate the need for an SRO, CFA agrees with IAA that the user-fee approach “offers the best option for funding enhanced inspections [of investment advisors] in a way that promotes investor protection while minimizing added costs to industry.” As a general principle, she said, “we believe in funding government agencies to do their jobs rather than farming out those responsibilities to private entities. Moreover, as a government agency, the SEC is more transparent and more accountable than a private regulator is likely to be.”
Dan Barry, managing director of government relations and public policy for the Financial Planning Association (FPA), says that there seemed to be some consensus at the hearing that “transparency is going to be important for any SRO that might have oversight of advisors.”
Indeed, Bachus said that if lawmakers are able to come to a “bipartisan agreement” on an SRO “there would have to be protection for state regulators and enhanced oversight over FINRA.” When asked by Bachus at the hearing if FINRA would be willing to accept enhanced oversight by the SEC, Ketchum replied: “Yes, we would.”
Subcommittee Chairman Garrett stated during the hearing that an SRO is needed for advisors because the SEC “has a lot on its plate—some would argue too much,” and that shifting oversight of advisors from the SEC to an SRO is necessary as exams of advisory firms are “not getting done.” That’s where FINRA’s stable of 1,000 examiners could help, added LPL’s Dwyer.
Dwyer also noted that while the SEC and self-regulatory organizations currently examine “more than half of the nation’s approximately 4,900 registered broker-dealer firms at least once a year, the SEC projects it will examine fewer than 10% of the more than 11,000 federally registered investment adviser firms during the fiscal years 2009 and 2010. The percentage of advisers audited is expected to fall to 7% in 2011.”
Dwyer, along with lawmakers and others who testified, voice deep concerns with the Department of Labor’s (DOL) controversial rule amending the definition of fiduciary. Dwyer told lawmakers that the “DOL should withdraw and re-propose its fiduciary proposal,” while CFA’s Roper said CFA has “very significant concerns about DOL’s proposal.”
While lawmakers and industry officials have expressed concerns for months regarding the DOL’s fiduciary rule proposal, “by most accounts the Department intends to press forward,” FPA’s Barry says.