More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial 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.
Carlo di Florio, director of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, told a Senate panel on Wednesday that even after the shifting of advisors with $100 million or less in assets under management to state registration by mid-2012, OCIE “will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisors with adequate frequency.”
Despite the fact that the Dodd-Frank Act shifted responsibility for examining smaller advisors to the states, di Florio told the Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment that the SEC is picking up under Dodd-Frank oversight of municipal advisors, five new categories of securities-based swap participants as well as hedge fund and other private fund advisors.
Said di Florio: “The approximately 25,000 registrants in the SEC regulated community in FY 2012 will dwarf the size of the current examination program (currently slightly less than 900 total staff nationwide). At current funding levels, we will not be able to expand our supervision of the population of current and future supervised entities.”
Di Florio went on to say that despite the fact that OCIE has instituted a new examiner training program, “no matter how much we improve [SEC exams] 830 examiners can only cover a small portion of the 25,000 registrants.”
While not specifically stating that FINRA should take up the slack and become the self-regulatory organization for advisors, the SEC, di Florio said, has one examiner for every 30 registrants, whereas the Financial Industry Regulatory Authority has one examiner for every five registrants. Only 8% of advisors were examined in 2011, he said, and one-third (38%) of advisors have never been examined. In addition, he said, out of more than 160,000 broker-dealer branch offices, less than 1% of these offices are examined by either the SEC or FINRA annually.
All six directors of the SEC’s various divisions, including di Florio, testified at the hearing, “Management and Structural Reforms at the SEC: A Progress Report,” with nearly all citing the tight budget constraints their divisions are working under specifically as they attempt to tackle added duties under Dodd-Frank.
Sen. Jack Reed, D-R.I., chairman of the subcommittee, said in his opening remarks at the hearing that “Congress must fully fund the SEC, our market watchdog, if it is to effectively discharge its mandate to police the markets and protect investors.”
As all six SEC directors noted in their joint written testimony, the next step under Dodd-Frank of “making the new oversight regimes operational will require significant additional resources.” But that increased funding doesn’t look likely.
Under a continuing resolution to fund the government until Dec. 16, the Commodities Futures Trading Commission would only receive $205 million for 2012, $100 million less than the amount requested by the Obama administration. The SEC’s budget under the continuing resolution is expected to remain flat.
Eileen Rominger, director of the SEC’s Division of Investment Management, told lawmakers that her division needs more staff members that have experience in asset management, as the agency is facing more complex products than it did five years ago. Rominger
Robert Khuzami, director of the SEC’s Division of Enforcement, reiterated to senators that his division filed a record 735 enforcement actions in the fiscal year that ended on Sept. 30, 146 of which were taken against investment advisors, a 30% increase over 2010.
The enforcement division, Khuzami said, is also examining mutual fund fee arrangements, announcing the same day that the enforcement division’s asset management unit charged Morgan Stanley Investment Management with violating securities laws in a fee arrangement that repeatedly charged a fund and its investors for advisory services they weren’t actually receiving from a third party.
When asked by Reed if any disciplinary actions have been taken against SEC employees for failing to catch the Bernie Madoff Ponzi scheme, Khuzami said the agency’s inspector general’s report identified 21 SEC employees that deserved disciplinary consideration.
However, he said, 10 of those employees have since left the agency and of the remaining 11, the SEC had an outside law firm conduct an investigation into whether disciplinary actions should be taken. The law firm recommended that nine employees receive disciplinary actions, Khuzami said. “Actions have been taken against all nine," he said.
Di Florio added that one of the nine staff members no longer serves in a supervisory role, underwent a salary reduction and was suspended for 30 days.