More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Just as I was assuming the NASAA presidency at our annual conference in Kansas last month, the question of investment adviser oversight took center stage at a congressional hearing 1,200 miles to the East.
Currently, the states are the sole regulators of investment advisors with less than $25 million in assets under management. By the middle of next year, this threshold will increase to $100 million, with the SEC overseeing IAs managing more than $100 million in assets. In the midst of this regulatory switch, some in Congress are considering inserting a self-regulatory organization for IAs into the mix.
In testimony before the House Capital Markets Subcommittee, my colleague, Pennsylvania Securities Commissioner Steve Irwin, outlined NASAA’s vigorous opposition to the creation of any self-regulatory organization for state-regulated investment advisors. And given our experience in working directly with various self-regulatory organizations, we have many issues that must be addressed and resolved before an SRO for SEC-registered investment advisors should even be considered.
Investment advisor regulation should continue to reside with state and federal governments. Government regulators bring to the table decades of unmatched experience. We see little benefit in constructing a new layer of bureaucracy with its incumbent expense.
If the goal is strengthening investor protection through improved oversight of SEC regulated investment advisors, then the fastest route there is to ensure that federal regulators have the resources they need.
House Financial Services Chairman Spencer Bachus, R-Ala., has offered an initial look at how an IA SRO might be constructed and
what its oversight role might be in the “discussion draft” of IA SRO legislation he released just days before the hearing.
This initial draft appears to be an over-reaching solution to enhancing the regulation of investment advisors by allowing industry to police itself.
It looks to us that the Chairman’s draft would nationalize the regulation of small- and mid-sized investment advisors. This would be a significant and costly mistake that does not benefit Main Street investors, nor promote small business interests.
Small and mid-size investment advisors are primarily located in one
SRO Issues: Conflicts, Transparency, Preemption
Our primary concerns with the SRO model are conflicts of interest and a lack of accountability, transparency and independence. Expanding industry self-regulation to investment advisors without first correcting the flaws of the SRO model will do nothing but prolong these structural failures.
Two other key areas are of great concern to state securities regulators. First, any increased role for an SRO with respect to federally covered advisors must not displace state laws. Preemption occurring because of industry self-made rules would undermine basic tenets of federalism and the democratic values from which regulation derives legitimacy.
Second, information sharing among state and federal regulators is essential to protecting investors. Unfortunately, under the SRO model, the “government actor doctrine” creates a barrier to collaboration and cooperation. FINRA, for example, has pointed repeatedly to this doctrine as a reason to refuse state regulators’ requests for investigatory cooperation. Correcting this flaw may require addressing the state actor issue by statute to ensure it no longer is an impediment to swift, aggressive and efficient enforcement.
Big Changes Over Next Year
The next 12 months will see changes in the landscape of investment advisor regulation. The “IA Switch” is on target for completion by the middle of next year and I have a sense that the concept of self-regulation for investment advisors will continue to demand our close attention. Many unanswered questions remain about the possible expansion of the SRO model to investment advisors. I was encouraged to hear Senate Banking Committee Chairman Tim Johnson, D-S.D., tell AdvisorOne that the SRO issue “deserves further exploration before moving forward with any legislative proposals.”
I look forward to continuing the work of past NASAA President David Massey toward strengthening our relationship with FINRA, as well as the SEC, and to enhance our investor protection efforts.
I especially look forward to hearing from industry groups like the Investment Adviser Association (IAA) and SIFMA in the coming year to build upon our already strong and positive working relationship.