More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
House Financial Services Committee Chairman Spencer Bachus reintroduced on Wednesday his draft bill calling for a self-regulatory organization (SRO) for advisors—one week after industry sources told AdvisorOne that an SRO bill was imminent.
On the same day, the House Financial Services Committee’s Capital Market Subcommittee grilled Securities and Exchange Commission (SEC) chairwoman Mary Schapiro at an oversight hearing. At the hearing, Schapiro said in response to a question from one lawmaker on her views of an SRO, that she spent 12 years at an SRO, and that “at a time when there are extremely limited resources in the federal government, the need to leverage an SRO is critical.”
Bachus said that his draft bill, which he introduced with Rep. Carolyn McCarthy, D-N.Y., is in response to an SEC study that revealed the agency lacks resources to adequately examine the nation’s nearly 12,000 registered advisors. As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended—as one of three options--a self-regulatory organization for Congress to consider as it looks for ways to help the agency monitor the industry.
The Bachus-McCarthy bill, the Investment Adviser Oversight Act of 2012, would authorize “one or more self-regulatory organizations (SROs) for investment advisors funded by membership fees.”
A vote on the bill could occur in the committee as early as next month.
The two lawmakers noted in introducing the proposed legislation that investment advisors and broker-dealers “often provide indistinguishable services to retail customers, yet only 8% of investment advisors were examined by the SEC in 2011 compared to 58% of broker-dealers.
Said Bachus: “The average SEC-registered investment advisor can expect to be examined less than once every 11 years. That lack of oversight, particularly in the aftermath of the Madoff scandal, is unacceptable. Bad actors will naturally flow to the place where they are least likely to be examined. Therefore, it is essential that we augment and supplement the SEC’s oversight to dramatically increase the examination rate for investment advisers with retail customers.”
The legislation would amend the Investment Advisers Act of 1940 to provide for the creation of National Investment Adviser Associations (NIAAs), registered with and overseen by the SEC. Investment advisors that conduct business with retail customers would have to become members of a registered NIAA, and the SEC would have the authority to approve the registration of any NIAA.
The proposal also recognizes the authority given to the states over small investment advisors in Title IV of the Dodd-Frank Act by preserving state authority over investment advisors with fewer than $100 million in assets under management, so long as the state conducts periodic on-site examinations.
Reactions to the proposal were swift and varied. David Tittsworth (left), executive director of the Investment Adviser Association (IAA), said that IAA “strongly opposes this ill-advised legislation that is intended to expand” the Financial Industry Regulatory Authority’s (FINRA) jurisdiction. “Outsourcing the SEC’s critically important role in regulating and inspecting investment advisory firms is not the right solution, particularly when FINRA has demonstrated its lack of accountability, lack of transparency, and poor track record. The legislation also would force smaller businesses to bear the excessive costs of FINRA oversight.”
FINRA released a statement just after the proposal was released stating that the “bipartisan bill…is an important and thoughtful effort to address a serious gap in investor protection. The bill recognizes the need for regular exams of investment advisers, while rightly focusing on retail accounts. As FINRA has said, the current level of IA exams is unacceptable, and SROs can help fill this untenable gap in the protection of investment advisory clients.”
Dale Brown, president and CEO of the Financial Services Institute (FSI), said that “hard-working American investors shouldn’t have to be regulatory experts to know whether their financial advisor is getting the proper oversight needed to ensure they’re protected.” From a business standpoint, "retail investment advisers have an unfair advantage over independent broker-dealers, who are examined by FINRA every two years. It’s time to protect investors and level the playing field.”
The Financial Planning Coalition—comprised of the Financial Planning Association, National Association of Personal Financial Advisors and the CFP Board—said, “While we agree with Chairman Bachus and Representative McCarthy that better oversight of investment advisers is needed, we oppose the legislation introduced in the House Financial Services Committee.”
As a recent Boston Consulting Group study found, the Coalition said, “outsourcing SEC oversight to a new SRO would be twice as expensive as directing adequate resources to the current SEC oversight program. Building on the SEC’s existing infrastructure and experience is a better option than creating an added layer of regulation, and could be accomplished more quickly and effectively, and at far less cost.”
In addition, “creating an SRO for investment advisers would unnecessarily burden small business owners with additional costs.”
Robert Miller, president of the National Association of Insurance and Financial Advisors (NAIFA), which has advocated that Congress authorize FINRA to become the SRO, subject to appropriate SEC supervision, said that the Bachus-McCarthy legislation "would provide an important consumer protection," at a time when "public faith in all financial professionals depends on intelligent regulation that provides appropriate oversight without creating overwhelming compliance burdens. When the SEC has never taken even a cursory look at a third of investment advisers, that creates a trust gap with consumers.”
Miller added that "having FINRA serve as the SRO for investment advisors would be the least disruptive and most cost-efficient option for these dual-registered NAIFA members.”
Ken Bentsen, executive VP of public policy and advocacy at the Securities Industry and Financial Markets Association (SIFMA), said that SIFMA "applauds" the legislation, noting that as Bachus and McCarthy point out "retail investment advisors are rarely visited by federal regulators, where their broker-dealer counterparts who provide similar services are seen regularly. We thank Chairman Bauchus for his thoughtful leadership on this issue and look forward to working with the Congress on seeing this legislation move forward.”