More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The National Association of Personal Financial Advisors (NAPFA) has sounded the alarm against House Financial Services Chairman Spencer Bachus’ bill calling for a self-regulatory organization (SRO) to oversee advisors.
Warning that the bill would hurt small-business owners “who provide sound financial planning to consumers and who put their clients’ interests first,” NAPFA officials said in a May 31 statement that the “seemingly innocently named” Investment Adviser Act of 2012 (HR 4624) would strip advisor examination and oversight from the Securities and Exchange Commission (SEC), the independent government agency that has overseen registered fiduciary advisors for more than seven decades.
Bachus, who will hold a hearing on Wednesday, proposes that SEC oversight of advisors be replaced with a nongovernment organization, the Financial Industry Regulatory Authority (FINRA).
“All advisors, and the American public, should be distressed that this bill would allow the foxes to rule the henhouse. Faced with this reality, NAPFA is sounding the alarm,” the NAPFA statement said. “FINRA’s member firms are some of the Wall Street broker-dealers who so recently created and sold to unsuspecting consumers the credit default swaps and toxic-mortgage-backed securities, which in large part led to the recent financial crisis.”
NAPFA sees eight ways in which FINRA oversight could hurt independent advisors and their clients:
- FINRA’s “exorbitant operating expenses and bloated salaries” make them more Wall Street than Main Street.
- FINRA’s mandatory membership fees would put many independent financial advisors who offer advice to middle-class savers out of business.
- The burden of making small business owners pay mandatory fees to fund FINRA salaries is “unconscionable.”
- FINRA is not subject to sunshine laws and does not have to hold open meetings.
- FINRA is not subject to the Freedom of Information Act and is “notoriously secret” about their books and records.
- FINRA is an organization run by Wall Street’s executives who, with a “wink and a nod,” purport to oversee their Wall Street colleagues. “This is like ENRON overseeing CPAs, or drug companies overseeing your family physician.”
- FINRA has no experience working with financial advisors held to the high fiduciary standard.
- FINRA acts like a government authority, but without government accountability.
“This issue is too important for truly independent, fiduciary advisors—and the American public—to ignore,” said NAPFA national chairwoman Susan John in a statement. “If Chairman Bachus achieves the hostile takeover of small business owners in our industry, he will drive good men and women out of business and harm the consumers they work so hard to serve. NAPFA strongly believes that a properly funded SEC is the best way to ensure investment advisers are truly working in the best interests of those they serve—with accountability and transparency.”
Read Combatants Gear Up for SRO Hearing at AdvisorOne.