More On Legal & Compliancefrom The Advisor's Professional Library
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Here’s an exchange I recently had with an independent registered rep, who has been a friend of mine for a long time. I hope you’ll find this as enlightening as I did.
RR: “I recently sent out a client satisfaction survey to my rather well-educated clients (if I do say so myself) explaining the fiduciary vs. suitability standard and asked if they were aware of which standard applied to our relationship and if that mattered to them. So far the answers are all: ‘Don’t know and don’t care.’”
Me: “Thanks for the email. I'd love to see what you actually sent to your clients. Did you really explain to them that as a registered rep under the ‘suitability standard’ you are legally working for your BD and therefore are legally required to represent its interests, rather than those of the clients? And did you go on to explain to them that under a fiduciary duty to your clients, you would be legally required to represent the client's interest, ahead of your own, or any other institution, including your BD? That's the reality, and my sense is that not one financial consumer in 10,000 truly understands this and its ramifications for who's really looking out for their best interests.”
RR: “Legal compliance didn’t allow me to go into the detail of the Suitability standard as I was not allowed to infer any relationship was better than any other. I got really upset at this and other restrictions and wrote an email to my BD’s head of marketing review—and this time, I sent it. The prior two or three emails I have written over the years, I deleted after venting. I have had one long phone call with the head of advertising compliance, with another scheduled this week, so they are being responsive, but they feel their hands are tied by FINRA in most instances.”
Me: Frankly, I can’t think of anything to add here; his response seems to illuminate the problem with our current system far better than I could.