More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Dodd-Frank placed great confidence in state investment adviser examination programs by increasing state IA oversight to those with $100 million in assets under management, up from $25 million. The switch, targeted for completion on June 28, is the largest single regulatory event involving a coordinated effort by the states and the Securities and Exchange Commission (SEC).
States have been preparing for the switch for more than two years and are ready and looking forward to accepting this increased regulatory oversight of midsized investment advisers.
Dodd-Frank mandated this switch, in part, to address a lack of federal IA oversight. The SEC Section 914 study did not consider or make recommendations regarding state regulated investment advisers. But before this solution even has had the opportunity to kick in, some in Congress are seeking to solve federal examination deficiencies by creating a new self-regulatory organization for state and federal IAs.
But the Investment Adviser Oversight Act of 2012 (H.R. 4624), introduced by Rep. Spencer Bachus, R-Ala., misses the target.
Without any evidence to suggest that state securities regulators are not reliably and effectively fulfilling their IA oversight responsibilities, H.R. 4624 would impose rigid examination standards on state regulators without corresponding standards on either the SEC or self-regulatory organizations (SROs). The bill would also require state governmental agencies to report to an industry-funded membership organization on an annual basis.
State securities regulators share concerns about the inadequate level of oversight provided for federally registered IAs. Investors deserve better than the status quo. But outsourcing governmental responsibility and expanding the financial service industry’s self-regulatory system to include state and federal IAs is a costly and overreaching solution to the current inadequacy of IA oversight at the federal level.
The legislation carves out a number of SEC-registered advisers from SRO membership, such as advisory firms with at least one mutual fund client; hedge fund managers and advisory firms with at least 90 percent of assets attributable to institutional and high-net-worth clients. As these exemptions pile up, only a fraction of the large SEC-registered IAs would be required to join the new SRO, yet all state-registered advisers would be herded into the SRO’s membership ranks.
Supporters of a new IA SRO cite Bernard Madoff's Ponzi scheme and the federal government’s lack of oversight as their primary motivations to close the regulatory gap in IA oversight. But given the large loopholes in the legislation, it is very likely that Madoff and his Ponzi scheme would have been exempt from the new SRO under H.R. 4624.
Dodd-Frank directed the SEC staff to study and evaluate various alternatives to increase the frequency of examinations of federally registered IAs. User fees were identified as the SEC staff’s primary recommendation to address the infrequency of examinations of federally registered IAs. This concept also has the backing of the industry’s leading organizations.
Requiring state-regulated IAs to join an SRO is the wrong answer to the question of how to improve the oversight of federally registered investment advisers. It will impose substantial costs upon these small, local businesses with little benefit to investors.
In fact, it will be a job killer as a recent survey by Massachusetts Secretary of the Commonwealth William Galvin confirms. More than half the state’s 649 IAs responded to a survey by the Massachusetts Securities Division and 41% of those who responded volunteered comments that the bill as presently drafted was likely to put them out of business.
We look forward to working with Congress to arrive at a legislative solution that hits the target and benefits investors without exposing small IAs to redundant regulation and imposing job-killing costs on these small businesses in order to support a new regulatory regime.