More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
FINRA’s board announced Friday that it would seek comment on its controversial plan to require brokers to disclose their compensation packages to clients.
The board said that it would seek comments via a Regulatory Notice. Specifically, the comment period will ask for feedback on a proposed rule that “would require a member firm that provides, or has agreed to provide, to a registered person enhanced compensation in connection with the transfer of employment (or association) of the registered person from another financial services firm (previous firm), to disclose the details of the enhanced compensation to any former customer of the registered person at the previous firm who is contacted about moving or moves their account to the new firm.”
The proposed rule would require such disclosure for one year following the date the registered person associates with the new firm. However, it would not apply to enhanced compensation of less than $50,000 or to customers that meet the definition of an institutional account pursuant to FINRA Rule 4512(c), except any natural person or a natural person advised by a registered investment advisor.
FINRA announced Nov. 29 that its board would be mulling such a rule at its Dec. 6 meeting.
Securities lawyer Patrick Burns spoke out publicly in an October interview with AdvisorOne saying that he wants to change the status quo in broker compensation. “Our clients who are investment advisors would like to see the playing field leveled in terms of disclosures,” Burns told AdvisorOne at the time.
“I think this proposal has some legs,” Burns told AdvisorOne in a separate interview before the Dec. 6 meeting. “There has been a lot of talk about FINRA harmonizing BD and RIA regulations, moving to a common fiduciary standard for RRs and IARs, etc.” The timing of the rule proposal, he added, is “very interesting.”
Said Burns: “Clients should receive full and fair disclosure about all direct and indirect costs of doing business with a brokerage firm, as well as conflicts (incentives to hit production targets, sell proprietary products, etc. needed to have their bonuses forgiven).”
Jonathan Henschen, president of Henschen & Associates, a broker-dealer recruiting firm, told AdvisorOne that while the FINRA proposed rule would be a "non-event" for the independent broker-dealer channel “wirehouses will be affected in a big way with reps concerned that disclosure to clients about their large bonus to move, make them look as if they are moving for their own interests rather than the clients.” Added Henschen: “When you consider the minute differences that exist between the wirehouses, it’s hard to argue with client’s potential conclusion.”
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