More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
“There’s a remarkable consensus around a fiduciary standard when advice is being delivered to retail investors,” said Skip Schweiss, introducing a panel of experts on the top regulatory issues facing advisors at the TD Ameritrade Institutional regional conference Tuesday.
Schweiss (left), TDAI’s managing director of advisor advocacy and industry affairs, noted that TD surveys advisors each quarter, asking what keeps them up at night. The top answer, he said, is consistently regulatory issues, so “we spend a lot of calories” in advocating for its affiliated RIAs in Washington.
On stage before the formal presentation at the St. Regis hotel in Dana Point, Calif., Schweiss showed his leanings on the fiduciary issue by pulling a ballcap from his pocket that bore the legend, “The ‘F’ Word Rocks,’ thanking his “good friend Knut Rostad” for supplying the chapeau (Mr. Rostad, for the unitiated, is chief compliance officer for the advisory firm Rembert Pendleton Jackson in Falls Church, Va., a leading light of The Institute for the Fiduciary Standard and a blogger for AdvisorOne—see his latest blog post—also on the fiduciary issue).
With that, Schweiss handed off the moderator’s duty to Investment News reporter Mark Schoeff, who introduced the panelists: David Tittsworth, executive director of the Investment Adviser Association; Barbara Roper, director of investor protection of the Consumer Federation of America, and Kevin Carroll, associate general counsel of SIFMA.
Confirming Schweiss’ characterization of regulation as top of mind for advisors and many others, Roper (right) began by saying that “how you regulate financial intermediaries is the single most important thing you can do to protect investors,” that current regulations are insufficient, and thus it’s appropriate to focus on implementation of Section 913 of the Dodd-Frank Act, which called for the SEC to consider applying a fiduciary standard to all advice-givers, not just RIAs, when they are providing investment advice to retail consumers.
There is, she said, a “fundamentally different relationship between broker and customer”and an advisor and clients. Citing the RAND Corp. research conducted on behalf of the SEC, she argued that “the majority of investors act on the recommendations they get” from their brokers or advisors “without doing any additional research,” thus constituting a engagement of “trust that demands a fiduciary relationship.”
Roper said the RAND study also discovered that “investors don’t understand the difference between a broker or an advisor, even after you explain the difference to them—so the investor can’t make an informed decision.”
Kevin Carroll of SIFMA agreed with Roper on this point. “Many of our members are dually registered firms,” and thus the securities organization has a “direct stake in how a fiduciary standard is implemented.” The securities industry realizes, he said, “that brokers and advisors are providing the same service,” so they should be held to the same, higher standard. Moreover, he said SIFMA member firms that follow “best practices are already meeting that standard; it makes consummate sense that the same services be held to the same standard of conduct.”
Taking up the issue, Tittsworth (who also blogs regularly for AdvisorOne) agreed that “functional regulation makes sense,” and that the “fiduciary standard has worked well” in protecting investors since the 1940 Investment Advisers Act, supported particularly by a 1963 Supreme Court ruling. (In that ruling, on SEC v. Capital Gains Research Bureau, the court held that Section 206 of the ’40 Act imposed a fiduciary duty on RIAs). However, Tittsworth said that IAA’s “concern is that the ’40 Act fiduciary standard will be watered down.”
Carroll said that for the SEC fiduciary rule, SIFMA is “looking for a more rules-based approach because so much of what the securities industry does is not providing personal advice,” mentioning IPOs and Wall Street firms’ roles as market makers, and mentioned that the 1963 Supreme Court ruling had “read into” the ’40 Act in establishing a fiduciary duty for RIAs.
In response to an advisor in the audience’s exasperated plea that the fiduciary issue was a simple one, Tittsworth responded by saying, “That’s the real debate here—you’ve hit it on the head,” between a principles-based and a rules-based approach to implementing a fiduciary standard. The tension between those two approaches exists not by accident, he suggested. “Section 913 is pretty convoluted” in its language, Tittsworth said, “because it was a compromise between groups like SIFMA and mine.”
Turning to the issue of Section 914 of Dodd-Frank concerning whether a self-regulatory organization should be set up for RIAs, Carroll called for “consistent oversight of advisors,” arguing that the current level of RIA exams by the SEC “is not acceptable.”
While Tittsworth and Roper both agreed that more examination of SEC-registered advisors is a noble goal, they both favor increased funding of the SEC to do so, particularly through user fees. Carroll, however, countered by saying that an SRO “is a more cost- and resource-efficient solution for our members and in general. Who would be best [for conducting exams of RIAs)? An SRO or the federal government,” meaning the SEC.
Tittsworth quickly disagreed with Carroll’s argument. “Nobody has ever said that FINRA is a super-regulator whose mandate should be expanded,” and cited the examples of other countries’ experience, notably the U.K. “SROs are in decline” by securities regulators worldwide, so “let’s give the SEC the tools to meet its mandates: consumer protection; fair and orderly markets; capital formation.”
Roper completed the conversation by noting that the CFA has been “asking for more funding for the SEC since Ronald Reagan was president,” to no avail. “The price to get an SRO through Congress,” Roper said, would be to “exempt out any big organization –like mutual fund companies—from SRO oversight. FINRA, she said “works now because all broker-dealers—big and small—are overseen” by FINRA. She concluded bluntly: “No SRO will get through Congress.”
On these topics, SEC Chairwoman Mary Schapiro said Tuesday that she still expects to propose a fiduciary standard under Section 913 next year, as AdvisorOne’s Joyce Hanson reported. But in the “be careful what you wish for” department, Tom Nally, president of TD Ameritrade Institutional, said separately at the California gathering that he worries that if a fiduciary standard (and I use an ‘a’ article rather than a ‘the’ article by design) is imposed on all advice-givers, it may be a watered-down standard. As such, he warned, it may prove to be a competitive disadvantage for RIAs who already operate under “the” fiduciary standard.