More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The Securities and Exchange Commission’s (SEC) Investor Advisory Committee held its inaugural meeting Tuesday at SEC headquarters in Washington, and the consensus among the diverse group of members was that their top goal would be to focus on protection of retail investors and to boost their confidence in the markets.
But SEC Chairwoman Mary Schapiro told AdvisorOne as the committee broke for a lunch break that the committee would “no doubt” also be instrumental in providing some valuable insights to the SEC as it continues to craft its rule to put brokers under a fiduciary mandate. “I hope we can take advantage of all this talent in the room,” she said.
Indeed, committee member Barbara Roper, director of investor protection for the Consumer Federation of America, told AdvisorOne that while the fiduciary duty debate is “not central” to most committee members’ agenda—as they instead expressed a desire to focus on the needs of retail investors—“there is no issue of higher importance for retail investors than how we regulate the intermediaries [such as the advisors and broker-dealers] they rely on.”
Staff members from various SEC divisions also pointed to other areas of investor protection that committee members should focus on: equity crowdfunding, which the SEC says is still “illegal” until the agency crafts rules; target date funds; and identity theft.
In her prepared remarks, Schapiro noted the “variety of backgrounds and perspectives” the various committee members bring to the table, which she said “is a great strength but probably also a challenge.” The goal of the committee—which will set its own agenda—she said, is to bring the “investor perspective” to the commission. The Investor Advisory Committee’s work, Schapiro said, will be “supplemented” by the SEC’s Office of Investor Advocate. The SEC is currently seeking someone to head this office, Schapiro said.
The SEC created an Investor Advisory Committee in 2009, but the Dodd-Frank Act replaced that committee with the current one. Another committee was formed in the 1990s under former SEC Chairman Arthur Levitt.
SEC Commissioner Luis Aguilar (left) noted during his opening remarks at the meeting that the Committee will provide “input on regulatory priorities, on disclosure and other regulatory issues, on initiatives to protect investor interest, and on initiatives to promote investor confidence and the integrity of the securities marketplace.”
Aguilar urged committee members to “focus on the needs of retail investors,” as these are the investors who “directly or indirectly provide the bulk of all capital invested in securities.” He cited reports that suggest “many individual investors feel like they are under siege,” noting one recent survey that said only 15% of Americans trust the stock market.
"Investors continued to withdraw cash from U.S. equity funds in 2011, continuing a trend that has seen a total outflow of a half a trillion dollars from domestic equity funds since 2006,” Aguilar said.
Committee member Steve Wallman, founder and CEO of FOLIOfn and a former SEC commissioner, agreed that “the capital markets, for many [investors] I think, have let them down.”
Committee members, who will serve a four-year term, used their inaugural meeting to go over bylaws and appoint a chairman, Joseph Dear, chief investment officer (CIO) of the California Public Employees’ Retirement System (CalPers). “We must find opportunities where we can agree, and advance an agenda,” Dear told other committee members.
Committee member James Glassman, executive director of the George W. Bush Institute, told Dear that he wanted to be “assured” that the committee’s agenda would focus on retail investors. “Yes,” Dear replied.
Craig Goettsch, Director of Investor Education and Consumer Outreach for the Iowa Insurance Division, on behalf of the North American Securities Administrators Association (NASAA), was appointed vice chairman.
J. Robert Brown, Jr., Law Professor at the University of Denver was appointed secretary, while Jean Setzfand, Director of Financial Security for the AARP, was appointed assistant secretary.
Several SEC divisions were on hand at the meeting to give committee members a rundown of the top issues they’re seeing that face investors.
The chief counsel of the Division of Corporation Finance, Thomas Kim, told the committee that as part of the JOBS Act, the division is grappling with the issue of equity crowdfunding, which allows investors of any net worth to fund entrepreneurial startups. “Crowdfunding is not yet legal until the commission appoints rules,” Kim said, adding that a timeframe for a rulemaking on equity crowdfunding is “challenging.”
While crowdfunding has been going on for a number of years as a form of raising money through donations from donors, the SEC must formalize rules for equity crowdfunding, which, as set out in the JOBS Act, allows capital raising through investors.