More On Legal & Compliancefrom The Advisor's Professional Library
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- 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.
As she said she would, Rep. Maxine Waters, D-Calif., introduced on Wednesday the Investment Adviser Examination Improvement Act of 2012, which would allow the Securities and Exchange Commission (SEC) to collect user fees from advisors to fund their exams in lieu of a self-regulatory organization (SRO).
In introducing the bill, co-sponsored by Massachusetts Democrats Barney Frank and Michael Capuano, Waters said that “it is absolutely essential that we improve the oversight of investment advisers—the people that manage the assets of millions of individual and institutional investors across the country.”
Since the crisis four years ago, she continued, “we have witnessed an unfortunate deterioration in the public’s confidence in our financial markets. Though the vast majority of investment advisers operate with integrity and want to help their clients meet their financial goals, it is clear that the SEC’s current examination levels need to be augmented in order to bolster the public’s trust in this marketplace.”
Like the Investment Adviser Association (IAA) and the North American Securities Administrators Association (NASAA), Waters said she believes the user fee approach, rather than the establishment of an SRO to examine advisors as put forth in a bill by her committee’s chairman, Rep. Spencer Bachus, R-Ala., “provides the simplest, most efficient solution to the problem of inadequate adviser oversight.”
She said that “because the user fees contemplated in my legislation would only be used to fund the regulation of investment advisers, and not to subsidize other functions at the SEC, I think that this option would be more cost effective for the industry.”
The Financial Coalition, comprised of the Financial Planning Association (FPA), National Association of Personal Financial Advisors (NAPFA) and the CFP Board, said in a statement that Waters’ bill was "a credible alternative to the Investment Adviser Oversight Act of 2012 (H.R. 4624), introduced in April [by Rep. Spencer Bachus, R-Ala.], which would impose higher costs and a redundant regulatory burden on small advisory firms by mandating that they join a self-regulatory organization (SRO), in addition to current SEC and state regulatory oversight.”
While admitting that the “the status quo is not acceptable” and that the frequency of advisor exams needs to increase “dramatically,” the coalition added that creating “a new SRO is not the right solution. The burden of excessive regulation and cost would fall unfairly on small-business owners while many larger firms would be exempt and would go unaffected.”
Between “Waters’ legislation and the recent Senate budget providing increased resources for investment adviser oversight, it is clear that an SRO is not the only option for increasing the frequency of examinations,” the coalition said. “We look forward to working with the Financial Services Committee on a solution that will enhance consumer protection by increasing oversight of all investment advisers.”
However, the Financial Services Institute (FSI), which supports Bachus' SRO bill, said in a statement that the SEC's Office of Compliance Inspections and Examinations (OCIE) estimated that, "in addition to its current enhancement efforts, OCIE would need to double the current number of its investment advisor examiners (460) to increase the frequency of examinations to even 20%." That roughly equates to 46 examiners per 1% increase, FSI says, "and thus the number of examiners needed to increase examination frequency to the average SRO examination rate of 43.5% would be 1,540, increasing the total to about 2,000."
FSI argues that "to increase the frequency to the Financial Industry Regulatory Authority's (FINRA) average, OCIE would need to add more than 2,000 examiners to its advisory program, bringing the total to about 2,500. To provide context for those numbers, OCIE currently has about 850 full-time employees covering all of its programs, and the Commission overall has about 4,000 full-time employees."
Key provisions of Waters’ bill include the following:
The fee calculation formula used to determine the fees to be paid annually by individual advisory firms shall be established by rulemaking.
- The fee calculation formula shall take into account the estimated costs and planned frequency of inspections, and factors including the adviser’s size and assets under management (AUM), number and types of clients, and other objective factors, such as risk characteristics, as determined by the commission.
- The commission shall review the fee calculation formula annually and, if it determines that it needs to be revised, it may do so—following notice and comment—before fees are assessed for the following fiscal year.
The U.S. Government Accountability Office (GAO) shall conduct an audit of the use of the fees and the fee calculation formula, including any adjustments, once every two years and issue a report to the House Financial Services Committee and the Senate Banking Committee.
Funds derived from the user fees are not “public funds” and are available to the SEC without regard to congressional appropriation, apportionment or other fiscal year limitation.