More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- 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.
Three key Washington heavyweights will have a crucial role in advisors’ lives next year: the newly christened SEC chairwoman, Elisse Walter; Rep. Jeb Hensarling, R-Texas, the incoming chairman of the powerful House Financial Services Committee; and Phyllis Borzi, assistant secretary for the DOL’s Employee Benefits Security Administration.
Indeed, the Washington landscape has changed somewhat since President Barack Obama was re-elected in November. SEC Chairwoman Mary Schapiro said goodbye in mid-December, but to Wall Street’s chagrin Elizabeth Warren, the architect of the Consumer Financial Protection Bureau, beat out sitting Massachusetts Sen. Scott Brown, and she has since secured seats on the Senate Banking and Senate Health Education Labor and Pensions Committees.
Massachusetts Democrat Barney Frank will also depart at year-end. Rep. Maxine Waters, D-Calif.–who introduced a user fees bill last year to thwart Rep. Spencer Bachus’s legislation calling for a self-regulatory organization to oversee advisors–will assume Frank’s role as Ranking Member on the House Financial Services Committee.
Hensarling made it clear to the Wall Street Journal in mid-December that he views his job as “regulating the regulators”–from the Federal Deposit Insurance Corp. to the SEC to the Federal Reserve.
While industry officials have predicted that Hensarling’s priorities will not include reintroducing in 2013 legislation introduced in 2012 by his predecessor, Bachus, calling for an SRO–namely FINRA–to oversee advisors, don’t count on FINRA and other powerful financial services groups to sit idle.
Despite assertions that Hensarling will put the SRO bill for RIAs “on the back-burner, the influence of FINRA, SIFMA, FSI, the insurance company lobby, and the Wall Street broker-dealer and investment banking lobby should not be underestimated,” says Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College. “As seen recently with its offer to act as arbitrator in RIA proceedings, FINRA continues to position itself as the solution for RIA oversight.”
Neil Simon, vice president for Government Relations at the Investment Adviser Association in Washington, told AdvisorOne in recent comments that while Hensarling will focus on "issues of clear national importance, including reform of Fannie Mae and Freddie Mac and reform of certain aspects of the Dodd-Frank Act," IAA will still "remain active on Capitol Hill to counter FINRA’s continuing effort to become advisors’ SRO."
However, Rhoades sees the “biggest” short-term development for advisors in the first part of 2013 being EBSA’s reproposal of its controversial rule to amend the definition of fiduciary under the Employee Retirement Income Security Act.
Indeed, Borzi–emboldened by another four years in her position under a re-elected Obama administration–is adamant that EBSA’s fiduciary rule will see the light of day. She told AdvisorOne in early December that EBSA would be releasing its fiduciary reproposal early next year. But Borzi promised that industry concerns have not fallen on deaf ears. Said Borzi: “When people see the reproposal, reasonable people with open minds will say [DOL] listened, that [DOL] addressed the legitimate issues that were raised in the long comment process.” She added: “The reproposal will be better, clearer, more targeted and more reasonably balanced.”
While there’s no question that DOL’s fiduciary reproposal will endure “tough opposition,” Rhoades says, “I believe it will be adopted.”
EBSA’s reproposed rule will be backed by a “substantial economic analysis,” and will likely apply “the strict ERISA fiduciary standard to nearly all those who provide investment advice to either plan sponsors or to plan participants,” Rhoades adds. Even more dramatic, he says, will be the extension of ERISA’s fiduciary standard to cover IRA rollover accounts. “With these moves, ERISA’s standards will apply to over $15 trillion of financial assets held by individuals and in retirement plans in the United States,” Rhoades says.
While definite action will occur on the DOL’s fiduciary rule in 2013, the SEC’s progress on its rule to put brokers under a fiduciary mandate is less clear.
The agency did announce in the “Looking Forward to 2013” section of its 2012 Financial Report, released in early December, that it plans to “move forward” next year with a uniform fiduciary standard rule for advisors and brokers as well as “continue to assess” ways to better harmonize advisor and BD rules when they are providing similar services.
But incoming Chairwoman Walter faces opposition from the two Republican commissioners, Troy Parades and Daniel Gallagher, who have “expressed reservations about a fiduciary rulemaking in the absence of appropriate cost-benefit information and analysis,” David Tittsworth, executive director of the Investment Adviser Association in Washington, told AdvisorOne in a recent interview. Thus, Tittsworth said, “Chairman Walter would have to address their cost-benefit concerns in order to move forward with a request for comments and, ultimately, a rulemaking on fiduciary standards.”
With Walter, a Democrat, now heading the agency–at least until the end of 2013–the commission will face a potential 2-2 deadlock on rules that come before it. As Rhoades notes, Walter’s Commissioner seat “must be filled before any action on applying the Advisers Act’s fiduciary standard to broker-dealers can take place.” Even then, he adds, “there may not be enough for a majority vote to issue a proposed rule or request for further comments.”
One possibility, Rhoades says, is that the commissioners “split into three camps: those who oppose application of the fiduciary standard upon broker-dealers; those who desire a weakened disclosure-based standard of conduct (not a true fiduciary standard, although it may be called such); and those who embrace a bona fide fiduciary standard for broker-dealers who provide personalized investment advice.”
As to investment advisory lobbying efforts next year, the Financial Planning Association recently announced that under the direction of new CEO Lauren Schadle, it will be replacing its Washington advocacy staff with The Raben Group, a Washington-based consulting and lobbying group.
The FPA, of course, is part of the industry lobbying consortium the Financial Planning Coalition, which also includes the CFP Board and the National Association of Personal Financial Advisors.
In early December, NAPFA announced that as of Jan. 1, it would only accept the CFP designation for people who applied to be NAPFA-registered financial advisors.
Rhoades notes that with the financial planning profession–while still diverse–increasingly becoming “centered around” the CFP Board’s certification process, and the rise in the number of CFP certificants “continuing,” the CFP Board “with its increased stature, will likely face closer scrutiny of its own application of the fiduciary standard upon its certificants.”
The question that Rhoades says remains is whether the CFP Board will lead “financial planners toward a true profession bound together by a bona fide fiduciary standard, or will it merely follow and, in doing so, risk losing its chance for preeminence as the consumer mark of choice in the years to come."
Check out AdvisorOne’s complete lineup of Outlooks for 2013.