More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- 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.
As the signs abound in Washington that new legislation on an SRO for advisors may soon be floated, Tom Bradley has another suggestion: institute a trial period under which FINRA would conduct exams of dually registered advisors, under the strict oversight of the SEC.
“The SEC should absolutely continue to examine and oversee pure fee-based RIAs,” said Bradley, president of TD Ameritrade Institutional, in an interview with AdvisorOne on Thursday, indicating the steps he suggested should take place immediately to address the issue of better oversight of advisors, “but there has to be a strong focus on improving the qualifications of the examiners.”
In addition, he called on the SEC to make RIA exams more consistent and to improve the training of its examiners. He then suggested that “a second thing to immediately explore and start on a trial basis” is to have FINRA examine dually registered firms. “This is what the dually registered folks say to me: if FINRA is already examining me, let’s do the whole thing at once,” arguing that it would be more efficient and also provide the benefit of better investor protection. As for those RIAs regulated by the states, Bradley said that the issues needed to be “explored” with the input of NASAA and the states.
On the issue of a fiduciary standard, Bradley reiterated his long-held and often–stated position. “I’ve always said this: if a person is providing ongoing fee-based advice they should be held to a fiduciary standard. Harmonization is not the answer when you’re talking about a sales process rather than an advice process; we must be careful about harmonizing rules that cover the sales process. I don’t see how you can harmonize that.” For those ‘advisors’ who operate now under the “sales laws but who provide advice for a fee," he argued, “they should be moved under the law created for that—the Investment Advisers Act of 1940.”
Bradley was quick not to disparage the role of such salespersons in the broader U.S. economic system. “In this country we distribute capital through the sales process for new issues and secondaries,” he pointed out, but “people have to realize they’re dealing with a salesperson—we need clarity around that. The average person doesn’t understand the difference,” he said, between a salesperson and a fiduciary.
Beyond his suggestion of a trial basis for FINRA exams of the dually
Showing that he has viewed reader comments on AdvisorOne on regulatory stories, Bradley said “someone was out there criticizing that idea, comparing it to Bernie Madoff,” whose outside accountants gave him a clean bill of health, but Bradley called the criticism “bunk.” Madoff, he pointed out, also “had the SEC and FINRA overseeing him.” Should Angel’s recommendations be adopted, said Bradley, the accounting firms would have to specially certified, but he also voiced satisfaction with TD Ameritrade's sponsorship of the Angel study. “It’s creating some debate and discussion within the industry—that was our hope.”
Asked whether the trial of FINRA conducting exams on the dually registered or having a third party conduct RIA exams was realistic, Bradley quickly responded. “If I were the head of the SEC, I’d do it immediately—fix the exam process, look at where we failed in some of our exams so we can learn from the process and get better.”
Speaking four days after running his second New York City Marathon (in 4:05; he also ran with his 18-year-old daughter) and two days after turning 49, Bradley said that “You can’t flick a switch and get FINRA to examine RIAs, but I would flick a switch to get FINRA to [examine the dually registered] on a trial basis. Have it closely overseen by the SEC, so that if the trial goes well, you could roll it out to all dually registered firms.”