More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
As Securities and Exchange Commission Chairwoman Mary Schapiro was stating last week her belief that the agency could issue a proposed rule to put brokers under a fiduciary mandate next year, the newest SEC commissioner, Daniel Gallagher, declared that the SEC must first determine if such a rule is “necessary,” stating the agency should focus on issuing guidance regarding failure to supervise.
During an Oct. 23 speech before the National Society of Compliance Professionals, Gallagher, a Republican, said that “it is important to note that the commission is not compelled to promulgate [fiduciary] rules pursuant to Section 913” of Dodd-Frank. Congress “granted the Commission authority to write [such fiduciary] rules, but left it to our discretion.”
Therefore, he continued, “any rulemaking pursuant to Section 913 must, then, be supported by commission findings that such rules are necessary, as well as a detailed understanding and analysis of the economic consequences of such rules.”
Noting that investment advisors and brokers are held to different standards under the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934, Gallagher pointed to the one area where he said the Exchange Act and Advisers Act “are in accord”–their treatment of failure to supervise liability for compliance and legal personnel.
Gallagher first talked about the need for the SEC to create “clearer guidance” of what makes a legal or compliance officer a supervisor back in February during the SEC Speaks seminar. He said during that speech that the issue remains “disturbingly murky,” and signaled that he’d like the securities regulator to develop “clearer guidance” on the issue.
Gallagher at the time said that the “old issue” of “failure to supervise” has become very relevant again.
During his Oct. 23 speech, he pointed to the “nearly identical language” in the Exchange Act and Advisers Act regarding the agency’s authority to impose sanctions on a person associated with an investment advisor as well as associated persons of broker-dealers.
Repeating what he said in his earlier speech, Gallagher said “the devil is in the details of the ‘if’ in the final clause of the statutory language: ‘if such person is subject to his supervision.’ ”
He went on to say that “while the line of cases addressing alleged failure to supervise liability provides some guidance on the subject, many questions still remain with regard to what makes a person a ‘supervisor’ as well as the actions such a person must take in order to satisfactorily carry out his or her supervisory duties.”
Gallagher also noted that “failure to supervise jurisprudence has developed almost exclusively through cases involving associated persons of broker-dealers, as there are relatively few investment advisor failure to supervise cases.” As a result, he said, “as unclear as failure to supervise liability is on the broker-dealer side, it’s even less clear for investment advisors.”
In moving forward with such guidance, the SEC’s failure to supervise “regulatory regime should be a series of guideposts and safe harbors, not a minefield,” he said. “The last thing we want is a system that by setting rigid standards discourages legal and compliance personnel from acting at all out of fear of being liable for any ‘wrong’ actions they may take.”