More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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.
Jason Zweig is causing controversy—again. The Wall Street Journal gadfly posted a column last week, suggesting the ongoing SRO debate would be solved not by the SEC, or FINRA, but with robots (seriously).
“Investment advisors are being examined infrequently, inconsistently and incompletely—largely because regulators are outnumbered and reliant on outmoded technology,” Zweig writes. “In a business world that routinely runs on ‘big data,’ it's time to put computers on the case.”
To make his case, he notes that in fiscal 2011, the SEC examined just 8% of the 12,600 advisors under its jurisdiction. Roughly 5,000 advisors have never been audited by the SEC. State regulators, who are responsible for inspecting smaller investment advisors, look a bit nimbler. Two-thirds of the states say they examine advisors at least once every four years.
“FINRA inspects brokerage firms roughly every two years. Those more-frequent inspections, however, didn't detect Allen Stanford or Bernard Madoff's Ponzi schemes.”
At the heart of these gaps, he adds, are antiquated databases and other crude technology that one person who deals regularly with regulators calls "right out of the Raiders of the Lost Ark warehouse."
“The Self-Regulatory Organization for Independent Investment Advisers, an organization in Oxford, Miss., established last year as a potential alternative to existing oversight agencies, says regulators need to embrace 'data analytics.' Computers should be parsing vast quantities of information in search of overall patterns and potentially risky exceptions.”
He explains that advisors “would have to upload standardized reports on all their clients' assets—with personal identification removed—to a national data repository each month. Software would probe for any gaps between the reported account values and independent records from the custodian firms where the money resides. Then, examinations would be driven by what pops out of the data, not by what pops up on the calendar—regardless of which regulator runs the show.”
To be fair, he notes regulation is inching into the electronic age.
He describes an operation at the SEC, the "aberrational performance initiative," which uses software to analyze data about hedge funds to look for unusually high or suspiciously smooth relative performance.
“The API project has already led to four fraud cases—with more in the pipeline, according to people familiar with the matter. Another team at the SEC electronically analyzes large amounts of data on more than 10,000 advisers—but much of the raw information isn't yet in automated form.”
But much more could be done, he concludes, at not much higher cost.