More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Securities and Exchange Commission (SEC) may likely issue a concept release this summer regarding putting brokers under a fiduciary mandate, Andrew “Buddy” Donohue, the former director of the SEC’s Division of Investment Management, said Monday.
Speaking at the Investment Management Consultants Association (IMCA) annual conference in National Harbor, Md., just outside Washington, Donohue—who’s now with the law firm Morgan, Lewis & Bockius—said that while the concept release will likely be issued this year, an actual rule proposal on a fiduciary standard for brokers this year is more doubtful. He noted the fiduciary debate is a politically charged issue internally at the SEC.
Donohue explained to AdvisorOne after his remarks that the concept release on fiduciary would list “a lot of questions” the commission would like answered, but it would not provide “details on which way the commission is leaning” regarding the fiduciary rule. The concept release would likely come after the SEC completed its cost/benefit analysis on the fiduciary proposal, he told AdvisorOne, but the concept release could also ask for more cost/benefit input. Another possibility, he said, was that the SEC would hold a roundtable after the concept release went out.
Steven Stone, also with Morgan, Lewis & Bockius, who sat on the same panel as Dononue titled, “Identifying and Adapting to Regulatory Change,” said the “wildcard now” is “how the SEC articulates the fiduciary standard of care. It’s unclear what approach the SEC is going to take.”
Another wildcard issue now is when House Financial Services Chairman Spencer Bachus plans to reintroduce his draft bill calling for a self-regulatory organization (SRO) to examine advisors. Sources tell AdvisorOne it will be soon. “If there is an SRO for advisors and FINRA is designated as that SRO, this will have a dramatic impact on your business,” Stone told IMCA members, 70% of which hail from brokerage firms.
Both Stone and Donohue acknowledged, however, that FINRA has pledged to set up a separate investment management division to deal with advisor oversight if it indeed does become an advisor SRO. Donohue added that there’s been little discussion “on whether it should be an inspection-only or a rulemaking SRO.”
While the SEC levied a record number of enforcement actions against advisors last year, both Donohue and Stone predicted that an “even greater” number of cases against advisors and broker-dealers will be seen in 2012. Speaking of the newly created Asset Management Unit within the SEC’s enforcement division, Donohue said that with “70 people devoted to find problems in the asset management area, they will deliver results.”
Indeed, Stone said the SEC’s enforcement division would prove to be advisors’ “biggest burden.”
Donohue and Stone said advisors and BDs should be aware of what they called the Top 10 areas for "regulatory and business risk" that the SEC will be zeroing in on:
- Conflicts, especially compensation related conflicts;
- Performance claims, especially hypothetical and portable performance;
- Valuation, especially for hard-to-value investments;
- Complex products when simple will do;
- Private funds;
- Rent-a-CCO & boilerplate procedures;
- Failure to do what you say you will do;
- Preferential treatment for certain clients;
- Personal responsibility for failure to supervise (not just in broker context); and
- Areas of advisor/broker/bank overlap and gaps.
For complete coverage of the 2012 IMCA Conference check out AdvisorOne's special home page.