More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- 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.
A long-awaited report by the SIPC Modernization Task Force outlining legislative recommendations and other changes related to the Securities Investor Protection Corporation has been released to the SIPC Board of Directors.
The 68-page report, the results of which include actions taken based on public comment and concerns voiced by members of Congress, includes 15 recommendations that cover everything from increased protections for consumers to continuing public education.
The SIPC Modernization Task Force was created in June 2010 to review the operations of SIPC and to recommend needed changes.
Orlan Johnson, chairman of the SIPC Board, noted that some of the recommendations would require congressional action, and other recommendations could be implemented by rulemaking. Further, he noted, "some of the proposals could be implemented without the need for either legislation or rulemaking."
Johnson also noted that the SIPC Board will consider the Task Force’s recommendations after reviewing all appropriate materials and commissioning any further empirical analysis it deems necessary.
In general, the recommendations addressed dollar limits that had not been adjusted in a number of years and also came down on the side of the small investor rather than the professional. In particular, recommendations 9-12 considered “potential claim[s] by either institutional customers or sophisticated retail customers, which are customers not intended to have their claims satisfied out of funds advanced by SIPC by the original drafters of SIPA.”
The recommendations, which will now be considered by SIPC’s board, are as follows:
- Increase the maximum level of customer protection to $1.3 million; index the level of protection to inflation;
- Eliminate the distinction in the levels of protection for cash and securities.
- Protect participants in pension funds on a pass-through basis;
- Amend the minimum assessment to the greater of 1) $1,000; or 2) the amount set by SIPC bylaw not to exceed 0.02% of the member’s gross revenues from the securities business;
- Allow for the use of the direct payment procedure in cases in which the total amount of claims aggregates less than $5 million;
- Require auditors of SIPC members to file copies of audit reports with SIPC;
- Affirm the obligation of banks and other custodians to safeguard Rule 15c3-3 accounts and to reaffirm that such accounts are subject to trustee control upon broker-dealer liquidation;
- Continue to vest the SIPA trustee with the same avoidance powers as a trustee in a case under the bankruptcy code;
- Continue to treat claims arising from repurchase and reverse repurchase agreements as general creditor claims;
- Continue to treat claims arising from open TBA contracts as general creditor claims;
- Continue to treat claims arising from credits received pursuant to soft dollar arrangements as general creditor claims;
- Continue to treat claims for fees earned in connection with underwriting or other transactions effected by a syndicate as general creditor claims;
- Study discrepancies between SEC Rule 15c3-3 and “customer property” under SIPA;
- International relations: SIPC to assist in the creation of an international association;
- SIPC to continue investor education efforts.