More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Industry trade groups, consumer advocates and advisor partners are gearing up for the House Financial Services Committee’s hearing Wednesday on Rep. Spencer Bachus’ bill calling for a self-regulatory organization (SRO) to oversee advisors.
Their collective rallying cry: an SRO isn’t needed—particularly if that SRO is the Financial Industry Regulatory Authority (FINRA). What to do instead? Fund the Securities and Exchange Commission (SEC) so that it can conduct more frequent advisor exams.
But FINRA will have a chance to defend itself as an official from the regulator is slated to testify. Others testifying include David Tittsworth, executive director of the Investment Adviser Association (IAA), as well as officials from the Financial Services Institute (FSI), the Securities Industry and Financial Markets Association (SIFMA), the North American Securities Administrators Association (NASAA), and the National Association of Insurance and Financial Advisors (NAIFA).
Charles Schwab and TD Ameritrade Institutional were both encouraging advisors who custody assets with the firms to “get involved” and write their representatives telling them why an SRO for advisors is a bad idea.
Bernie Clark, executive vice president and head of Schwab Advisor Services, sent a letter May 30 to all of the principals at each of the 7,000 firms that custody at Schwab, telling them that he would be joining the IAA's annual lobbying day Thursday on Capitol Hill.
This year’s focus, says Tittsworth: “voicing opposition to the Bachus SRO bill,” the Investment Advisor Oversight Act of 2012, H.R. 4624.
Clark asked advisors in his letter to write, e-mail or tweet their representatives about the negative effects of an SRO.
The “resolution” of whether there should be an SRO for advisors “could have a substantial impact on your business,” Clark said in the letter. “Most notably, Bachus’ proposed legislation—if passed—would subject advisors to oversight by an SRO and regulation very similar to that which broker-dealers face.”
Skip Schweiss, managing director of advisor advocacy and industry affairs at TD Ameritrade Institutional, says that while there is a “general acknowledgement” that exams of advisors “needs to improve, we think there are ways to do that different than another regulatory layer” via an SRO.
“Advisors should take the time and be heard on this issue” buy contacting their representatives, he said.
Senate Banking Committee chairman Tim Johnson, D-S.D., has expressed his lack of appetite for creating an advisor SRO, “but it’s impossible to speculate,” Schweiss said. Issues get attached to other pieces of legislation, and “who knows, next thing you know [an SRO for advisors] is law.”
Indeed, former SEC Chairman Harvey Pitt, who's now CEO of Kalorama Partners in Washington, told AdvisorOne that “FINRA’s success or failure in becoming the regulator for advisors will depend on its ability to persuade Congress that having an existing infrastructure already in place, and having the resources to devote to expanding [its] internal assets” makes it the better choice than creating a new SRO from scratch.
Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), told Bachus, Rep. Barney Frank, D-Mass., and other committee members on Monday that while she's disappointed the hearing on Wednesday will focus on just the SRO option, not the other two options that have been proposed, user fees and funding the SEC, she is a "realist." CFA, she said, is "prepared to consider an SRO as a meaningful improvement over the status quo if that SRO is appropriately designed. After all, one of the advantages of an SRO is that it is not subject to the vagaries of the congressional appropriations process."
Unfortunately, Roper continued, "as currently drafted, H.R. 4624 does not meet the standard of an appropriately designed SRO." She told committee members that "rather than moving forward with a bill that clearly fails to solve the issues it is intended to address, we urge the Committee to conduct an objective review of the available alternatives in order to arrive at an approach that increases the quality of oversight at a reasonable, and equitably shared, cost to the investment advisor community and their clients."
With votes to be taken in the House Financial Services Committee likely before July, Tittsworth of IAA adds that “in and of itself that is something that we and the advisory community should be concerned about.” While it “may be unlikely that the Senate will consider similar legislation this year, it would be foolish to be complacent when elected officials start casting votes on an issue that is not likely to go away.”