More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
In my last blog for AdvisorOne, I wrote about the Congressional Republicans holding up an SEC funding increase for lack of enforcement performance. I further suggested that the second shoe to fall in this pair of bizarro Topsiders was the SEC stepping up its efforts to enforce investment advisor regulations at a time when Congress and the Commission are allegedly focusing on how to institute an RIA-like fiduciary standard for brokers, as mandated by Dodd-Frank. Can we hold up all Federal salaries in Washington for lack of performance?
Apparently, the Congressional threat to withhold SEC funding is having the desired effect. As reported by AdvisorOne’s Melanie Waddell on March 8, at the Investment Adviser Association’s annual compliance conference, the deputy director of the SEC’s Division of Investment Management Robert Plaze, warned chief compliance officers that the newly created Asset Management Unit “is dedicated to suing you.” Then, Sean McKessy, chief of the SEC’s newly formed Office of the Whistleblower, told attendees “that his office is receiving tips and complaints about advisors.”
Why the crackdown on RIAs? A cynical mind might conclude that for (insert your reason here), House Republicans are giving way too much credence to SIFMA’s contention that, despite the Treasury Department’s original financial reregulation assertion that public protection requires a broker fiduciary standard, the real problem here is “under-regulated” investment advisors. If true, it’s an impressive piece of strategic sleight-of-hand, which looks to turn a consumer protection slam-dunk into regulating independent advisors out of business, with or without FINRA oversight.
Yet the success or failure of this regulatory fantasy rest upon the extent to which the Congressional Republicans, and anyone else who goes along with it, can continue to ignore reality. On the off chance that anyone is actually interested in the facts, here’s a modest attempt to interject a dose of reality into the discussion.
First, let’s look at the relative sizes of the broker universe and RIAs. According to Cerulli & Associates, at the end of 2010, there were 50,200 brokers on Wall Street working in retail sales/advisory positions vs. 41,500 RIAs and dually registered broker/RIAs. The Tower Group tells us that during the five year period from 2005 to 2010, the number of wirehouse brokers fell some 20%, while the number of RIAs increased 66%; so based on recent reports of the continuing defection of breakaway brokers, it’s a fair assumption that the number of brokers and dually registered advisors today is even closer than the Cerulli figures indicated.
On the enforcement side, according to FINRA, in 2009, 7,137 arbitration cases were brought against brokers, and in 2010, that number was 5,680. The percentage of those cases that resulted in damage awards has increased from 42% in 2008 to 48%, or roughly half, in 2011. Also as an indication of the volume of broker complaints each year, FINRA lists its pool of arbitrators as including 2,854 industry panelists and 3,557 non-industry panelists—for a total of 6,411 arbitrators on call.
On the RIA side of the equation, according to Bloomberg, in 2010, “the SEC took 113 enforcement actions against investment advisors or investment companies.” That’s right: at least some of those 113 involved investment companies rather than RIAs. How many of those remaining RIAs were affiliated with FINRA-registered broker/dealers we don’t know. But even without discounting those figures, we’re talking about two groups with roughly the same number of professionals—one with 113 complaints, the other with 5,680 or so. (For you quants, 113 is 2% of 5,680.) Brian Hamburger, the Englewood, N.J-based securities attorney and the founder of MarketCounsel, which advises RIAs and brokers on compliance, sums it up this way: “More than 90% of the complaints we see are against brokers and broker-dealers, rather than against advisors.”
So who’s the problem here? Even if the SEC enforcement efforts aren’t what they should be (which I seriously doubt), it’s hard to imagine that 113 would grow to anywhere near 7,137 or even 5,650: if RIA problems were 10 times greater than the SEC has uncovered, they would still be only 20% of the broker arbitration number.
If Congress and the SEC are truly interested in increasing protections for retail financial consumers, they’ll refocus their efforts on making broker regulation more like investment advisor oversight—and not, bizarrely, the other way around.