More On Legal & Compliancefrom The Advisor's Professional Library
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- 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.
The Project on Government Oversight (POGO), a nonpartisan independent watchdog, told House Financial Services Chairman Rep. Spencer Bachus, R-Ala., and the ranking Democrat, Barney Frank of Massachusetts, in a letter on Tuesday that it opposes Bachus’ bill to create a self-regulatory organization (SRO) to oversee advisors, H.R. 4624.
POGO, which investigates corruption, misconduct and conflicts of interest, told Bachus and Frank that it has joined others in “raising serious concerns” about the Financial Industry Regulatory Authority (FINRA), which is said to be the lead SRO candidate. The SRO’s “regulatory effectiveness is undermined by its inherent conflicts of interest, its lack of transparency and accountability, its lobbying expenditures, and its executive compensation packages, among other issues,” Angela Canterbury, POGO’s Director of Public Policy and Michael Smallberg, a POGO investigator, told the lawmakers.
The POGO officials said that “there is no substitute for governmental regulation of the investment advisor industry. Therefore, we urge the Committee to reject H.R. 4624.”
In its letter, POGO then cites FINRA’s “conflicted mission,” which leads to “cozy ties with industry.” FINRA, the watchdog says, “collects fees from its member firms and invests in the securities industry, while also assuming responsibility for regulating and disciplining these firms, raising concerns about an inherent conflict of mission.”
POGO said it believes that FINRA’s “inherently conflicted self-funding model has contributed to an incestuous relationship between FINRA and the industry it is tasked with regulating.”
The watchdog also cited FINRA’s “lack of transparency and accountability” and urged the House Financial Services Committee to “probe these issues before delegating any additional governmental authority to FINRA or another SRO.” POGO cited a recent Government Accountability Office (GAO) report which noted that one of the potential drawbacks of creating an SRO for private funds is that it would “limit transparency and accountability, as the SRO would be accountable primarily to its members rather than to Congress or the public.”
In the case of FINRA, POGO says, “even industry groups have expressed frustration with the organization's lack of transparency and accountability. The Chamber of Commerce, for instance, has noted that FINRA is not bound by the system of checks and balances that applies to government agencies.”
Yet another reason FINRA should not be an SRO candidate, POGO argues, is because FINRA spends an “excessive” amount on lobbying and executive compensation. “FINRA spent nearly $4 million on lobbying between 2008 and 2011, according to the Center for Responsive Politics, not to mention its significant expenditures on advertising and 'public interest' spots in national media outlets,” POGO says. “These figures do not include the significant lobbying expenditures and campaign contributions made by FINRA's member firms.”
POGO also cited various sources that have attested to the cost of an SRO for advisors.
“There is no question that the SEC—which is already working with limited resources to implement a wide range of requirements under the Dodd-Frank Act—would have to set aside significant budgetary and staffing resources to oversee an investment advisor SRO,” the POGO letter states.
“In some cases, these oversight duties may even result in a duplication of efforts between the SEC and the SRO. POGO agrees with SEC Commissioner Luis Aguilar's statement that creating an investment adviser SRO would be an ‘illusory way of dealing with the problem of resources.’”
Read FINRA Hits Back in Battle Over Advisor SRO on AdvisorOne.