More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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 AdvisorOne on Tuesday that the recent boost in funding that the SEC received from Congress is not enough to thwart the need for a self-regulatory organization to help the agency oversee advisors.
Di Florio (left) told AdvisorOne at the agency’s Compliance Outreach Program National Seminar at SEC headquarters, that while "the SEC could do very well in examining advisors, if [the agency] doesn’t receive additional funding” an SRO is a viable option to help examine advisors. Right now, he said, the agency is at about a 10% exam level, and that needs to be boosted to 30%.
SEC Commissioner Elisse Walter (right) also remarked at the seminar that the “number and frequency of advisor exams simply must increase.”
As part of a spending bill to avert a government shutdown, Congress approved a package on Dec. 16 that allocated $1.3 billion for the SEC, which was $136 million over last year’s level but $86 million below the administration’s request. The $1.3 billion appropriation for the SEC still falls short of the $1.5 billion authorized under the Dodd-Frank Act for 2012.
That funding, di Florio said, "does not close the gap" that the agency still has in resources needed to examine advisors.
Di Florio also told AdvisorOne that the rule to put brokers under a fiduciary mandate that the agency is working on is “not unrelated” to the SRO issue. “If you’re moving toward a fiduciary standard, then there’s going to be a greater need to examine those fiduciary standards,” he said.
Di Florio said still in play are the three recommendations put forth in the SEC study mandated under Section 914 of Dodd-Frank to help the agency better oversee advisors: impose user fees on registered investment advisors to help fund their exams; authorize one or more SROs to examine advisors; and authorize the Financial Industry Regulatory Authority to examine dual registrants for compliance with the Investment Adviser Act.
While Dodd-Frank gave the SEC the authority to move forward on a fiduciary duty for brokers without approval from Congress, the agency can’t move forward with establishing an SRO until Congress enacts legislation telling it to do so. However, di Florio says the issues are intertwined, and “the views that are going to be considered by Congress and the [SEC] commissioners” regarding the fiduciary duty rule will certainly affect the advisor SRO outcome.
Industry officials still anticipate “soon” a redraft of House Financial Services Chairman Spencer Bachus’ bill calling for an SRO for advisors. Bachus, R-Ala., recently announced that he will leave his post likely when a new Congress convenes in January 2013 due to term limits, which means he may attempt to aggressively push through his committee a redraft of his SRO bill.
Bachus’ initial draft SRO bill 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.