More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- 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.
For the record, let me just say that I was for SIFMA’s and NAIFA’s position before I was against it. I’m talking about the responses of two of my favorite trade organizations to FINRA’s proposal to require the disclosure of the bonuses that brokers are paid to change firms. In the interest of full disclosure, my Jan, 11, 2013 blog clearly stated that I thought FINRA’s proposed rule change was a dumb idea: If brokers and their firms had to start disclosing the payments and fees that created conflicts with their clients, the list would be virtually endless.
But I have to admit that my resolve started to waver when I read that in their comment letters to FINRA, both SIFMA and NAIFA agree with me. Yikes! Fortunately, their reasoning is so typically convoluted that I can at least take issue with their arguments, if not their conclusion.
(See Melanie Waddell's latest article on the broker recruitment proposal.)
As best as I can tell, both organizations are arguing that FINRA is barking up the wrong tree because recruiting bonuses do not always present a conflict of interest. As a non-lawyer I may be a bit fuzzy on the legalities here, but it’s my understanding that both SEC and FINRA regs identify areas of potential conflicts of interest, and then require disclosure of each occurrence, so that investors can make up their own minds about their comfort level with the specific circumstances. That would be the time for the broker or their firm to point out why they believe that no material conflict exists. Then their clients could be the judges. If the standard for disclosure was that a circumstance always created a conflict, it’s doubtful if anything would qualify for disclosure (even some proprietary products are less profitable than their alternatives).
But that’s not all. Gary Sanders, NAIFA vice president for government relations, sets the record straight in his March 1 letter: “The fact that certain incentives were received by the registered representative in connection with such a move should not, in and of themselves, call into question the motivation behind such a move or serve as an indication that any such move was made for any reason other than the best interests of the representative's clients.” Really? Is that a sentence that could have been written by anyone but a lawyer? If brokers get paid big bucks to change firms, the reasonable presumption should be that the move was made for the clients’ benefit? You just can’t make this stuff up.
Not to be outdone, our friends at SIFMA brilliantly tied not disclosing the amount of the recruiting bonus with a fiduciary standard for brokers. Ira Hammerman, SIFMA general counsel, writes: “…consistent with SIFMA's support for a uniform fiduciary standard ... SIFMA has a long-standing record of support for disclosure to investors of potential conflicts of interest. In the context of recruiting-related bonus payments, the most important and relevant information for the client is to understand the potential conflict associated with the payment. Accordingly, SIFMA believes that disclosure about the potential conflicts themselves should be the centerpiece of the proposed rule.” After all, investors might be prejudiced into thinking the move to change brokers wasn’t solely for their benefit if they knew the actual amount of the bonus.
After reading these arguments, I can’t help but wonder if I’m on the wrong side of this debate. I guess it’s times like these that really help us measure our convictions. I still believe that disclosing recruiting bonuses is an arbitrary concern intended to reduce recruiting bonuses—and can’t help but think that SIFMA and NAIFA’s lame legal caterwauling is just cover to look broker-centered.