More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- 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.
At most advisor conferences, you can expect to hear speakers opine about the markets and the economy, to get practice management tips from consultants and peers, to receive retirement, tax and estate planning tips and to get updates from the conference sponsor about the state of their business. Oh, and there will usually be at least one session on compliance. All of that was in evidence at the first annual Shareholders Service Group national conference, being held in San Diego Wednesday through Friday of this week, but with a twist.
Compliance and the current state of advisor regulation was not a side issue at the SSG conference. It was front and center at the conference beginning with CEO Peter Mangan’s welcoming address to the nearly 300 people in attendance at the conference, to former Schwab and Fidelity RIA chief Charles Goldman’s speech and, no doubt, to the getaway session featuring inside-the-beltway expert Greg Valliere on Friday.
Mangan brought up the trust and fiduciary issue on Wednesday, suggesting that independent RIAs, including those affiliated with SSG, had an advantage with clients over the wirehouses and ‘advisors’ of other big institutions because of their trust-building fiduciary approach to serving clients. He also suggested that if FINRA really wanted to be the SRO for advisors that it might do well to oversee the corporate RIAs and the dually registered reps of broker-dealers rather than independent RIAs.
Goldman, now a consultant, addressed the possibility of a universal fiduciary standard for all advice-givers, but argued that it “would be criminal and unfortunate” if such an extended standard became rules-based, as the advocacy groups for brokers have suggested, rather than the principles-based fiduciary rule that RIAs have always operated under.
Some 75 or so of the 215 advisors at the conference attended a breakout compliance session on Thursday moderated by this AdvisorOne editor titled, “A Year in the (Compliance) Life of an Advisor.” What is the current state of Dodd-Frank implementation? According to Kelli Capitano of National Compliance Serves, the SEC has taken about 75% of the steps required under the landmark 2010 Wall Street Reform and Consumer Protection Act, but some key issues remain unresolved. Among those unresolved issues were some pretty big ones, notably the possible extension of a fiduciary standard to brokers and a decision on whether there should be an SRO to oversee RIAs, said Capitano, an attorney who is VP of Investment adviser services at National Compliance Services Inc.
The other member of the compliance panel, Christopher Winn, founder and managing partner at AdvisorAssist, noted that there was a “self-preservation aspect” of FINRA’s desire to be the SRO for advisors. In Goldman's speech later Thursday, he said Richard Ketchum and FINRA were “lobbying hard to become” that SRO, though Capitano pointed out that there remained a question of whether FINRA had the “skillset” to regulate RIAs. Goldman pointed out later that FINRA had admitted it didn’t have the existing structure or expertise to regulate RIAs. In Congressional testimony last September, as previously reported by AdvisorOne, Ketchum, CEO of FINRA, pledged that it would build such a structure, “a separate entity with separate board and committee governance to oversee any advisor work, and would plan to hire additional staff with expertise and leadership in the adviser area.”
The compliance session panelists addressed how another aspect of Dodd-Frank implementation was playing out: the ‘big switch’ of RIAs with less than $100 million in AUM from federal to state oversight. “The state regulators are being smart about how they deploy their teams” in handling what Winn said was “a level of activity that they’ve never seen before” with the several thousand advisors nationally making the switch. He’s heard of a rush of exams of state-registered RIAs in the first two months of the year so the states can clear their schedules to accommodate the big switch. Since, Winn said, “field examiners are being called into doing registration work” at state securities commissions, there may very well “be a pause in exams this spring” since those field examiners are in the office rather than in the field.
In what should be good news for advisors moving to state registration, Capitano said that “states are reaching out to RIAs,” and appear to be taking more of a risk-based approach to exams. Winn agreed saying he has been “pleasantly surprised by the outreach” of the states and even the responsiveness of the SEC to inquiries. Winn prompted laughter from the advisor attendees when he concurred with Capitano on states’ kinder-and-gentler approach to exams in the short run. “Some states have even changed the name” of their exams in correspondence with advisors, Winn said, from ‘audits,’ to “‘technical assistance’ requests,” reflecting a more collaborative approach to conducting exams.
However, Capitano said that “states will be prepared” to conduct exams, and that “they will find things that are wrong.” Winn agreed, and suggested that advisors should always “do what you say” to stay on the right side of regulators. Among their suggestions to prepare for a visit from either SEC or state regulators:
- Winn recommended that advisors prepare and share with examiners a PowerPoint slideshow that describes the scope of their businesses
- Capitano suggested that to avoid running afoul of restrictions on testimonials and advertising that advisors “not forget that your website is advertising.”
- Be aware, said Capitano, that if you’re moving from Federal to state registration, if you are registered in different states, “you might have conflicts” between the requirements of the different states
- Winn suggested that you cross your t’s and dot your i’s as well. “Have a trade error log, even if you have never made such an error.”
Read full coverage of SSG's 2012 Conference in San Diego at AdvisorOne.