More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- 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.
Just as the SEC prepares for a new chairwoman, the agency is experiencing “internal turmoil,” and its workload under the Dodd-Frank Act presents myriad compliance challenges for the agency—chief among them is effectively examining advisors, former SEC Chairman Harvey Pitt said Thursday.
Speaking at the Investment Adviser Association conference in Arlington, Va., just outside Washington, Pitt said that despite the fact that the SEC has a newly focused and more sophisticated exam program, the agency lacks the proper funding to effectively examine advisors, and a self-regulatory organization like FINRA, along with outside compliance audits, would provide the solution.
Giving FINRA the authority to examine advisors and outside compliance audits are “not mutually exclusive,” Pitt (right) told reporters after his speech. The SEC, he said, “can’t handle” examining advisors.
Indeed, Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), told reporters after his speech at the conference that while the agency was “indifferent” as to whether user fees assessed by the agency or an SRO should be used to help the agency boost advisor exams, he welcomes congressional action authorizing an SRO. “The problem to solve is to increase the number of advisor exams we conduct,” he said.
As to Pitt's suggestion to use outside compliance audits, di Florio called it "an interesting idea."
Pitt also told attendees that FINRA CEO Richard Ketchum’s recent announcement that he had “ceased advocating” for FINRA to become advisors’ SRO “doesn’t mean this issue won’t resurface.”
Indeed, Pitt told reporters that he would prefer FINRA become advisors’ SRO, or private sector regulator. FINRA and Ketchum have a “world of experience” in regulation, Pitt said. Creating an SRO from scratch is “doable,” he said, “but it’s costly” and not as expedient.
Pitt went on to tell attendees that the nation’s “current regulatory environment is a mess,” and that Congress and President Barack Obama used the Dodd-Frank Act to “foist government overreach on financial services firms.”
Dodd-Frank, Pitt said, also “set the SEC up for failure” and gave the agency “too much authority that it can’t possibly implement.”
Add to that the fact that employees left behind after former SEC Chairwoman Mary Schapiro’s departure in December “are dealing with a deep philosophical divide,” Pitt said, which “threatens to prevent the SEC from implementing meaningful reform.” Indeed, incoming SEC Chairwoman Mary Jo White, Pitt continued, “has her hands full, but she’s bright, talented and creative and if anyone can solve these challenges, she can.”
While not knowing where White stands on various policy issues, including an SRO for advisors, Pitt said he believes that White will “seek input” from her fellow commissioners and SEC staff as she gets up to speed.
As White heads to her nomination hearing before the Senate Banking Committee on Tuesday, Pitt said that senators “should be falling all over themselves to confirm her.” White “has a lifetime of fabulous experience and she plays well with others.”