More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Just as incoming Securities and Exchange Commission (SEC) Chairwoman Mary Jo White has pledged to lawmakers that she would carefully weigh the costs of a fiduciary rulemaking, Richard Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA), is renewing his call for a self-regulatory organization to oversee advisors.
Mary Jo White, President Barack Obama’s pick to replace current SEC chair Elisse Walter, told members of the Senate Banking Committee during her confirmation hearing in mid-March that she would “commit” to reviewing the comments the agency receives on its fiduciary rule before releasing a proposal on the issue.
Sen. Mike Crapo, R-Idaho, ranking minority member on the committee, asked White for assurance that if she was confirmed as the new SEC chair that before writing a rule, she would first review the comments the agency receives on its March 1 request, which asks for public data regarding the “potential regulatory costs” to implement proposed changes to fiduciary standards for broker-dealers and investment advisors. White responded that she would “absolutely” do that, as “this is an important area.”
Indeed, in her testimony, White said that one of her “focus” areas while chairwoman will be regulating the conduct of broker-dealers and investment advisors when giving retail investment advice.
While White said that finishing rulemaking mandates under the Dodd-Frank and JOBS Act “in as timely and smart a way as possible” will be her top priority at the agency, she could not name her top three rulemaking priorities when asked by Sen. Jack Reed, D-R.I.
Stating that the Dodd-Frank and JOBS Act have both placed a “daunting” task on the agency, White told lawmakers that she intends “to personally take charge in assessing” which rules will be priorities.
Despite Ketchum’s comments to the contrary, FINRA’s efforts to oversee advisors are alive and well. In comments before the Consumer Federation of America in mid-March, Ketchum said that “a fiduciary standard, alone or coupled with other regulatory harmonization,” for broker-dealer and advisor rules “is not a guarantee against misconduct.” Compliance, he said, “must be regularly and vigorously examined and enforced to ensure the protection of investors.”
Ketchum then quoted the SEC’s staff study under Dodd-Frank, which said that “to fully protect the interests of retail investors, the Commission should couple the fiduciary duty with effective oversight.”
The SEC’s ability to examine advisors, Ketchum maintained, “remains inadequate. And, sadly, the SEC continues to find serious problems when it conducts exams.” For instance, he cited the SEC’s recent findings of “significant violations” by advisors of the agency’s custody rule. Said Ketchum: “If investors are to be protected, investment advisors need to be examined regularly and vigorously. It’s as simple as that, and it is not happening under our current system.”
As securities lawyer Patrick Burns said: “Clearly, FINRA is still looking to regulate investment advisors.” At this stage, Burns said, “FINRA is lobbying for the establishment of a common fiduciary standard for brokers and investment advisors. Mr. Ketchum’s remarks, though, go on to state that their efforts are more than just about ‘harmonizing’ standards of conduct. FINRA is seeking to standardize additional rules and regulations for investment advisors and brokers, perhaps as a precursor to harmonizing oversight as well.”
One of the other options SEC staff gave Congress to boost oversight of advisors was to allow the SEC to assess user fees for advisor exams. Rep. Maxine Waters, D-Calif., ranking member on the House Financial Services Committee, is apparently preparing to reintroduce her user fees bill.
Even former SEC Chairman Harvey Pitt told compliance officers in March 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.
Pitt told reporters after his remarks at the Investment Adviser Association’s compliance conference that he would prefer FINRA become advisors’ SRO. 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.
Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), told me 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 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.
Now, to be clear, Ketchum had said in an interview with Reuters in early February that FINRA’s efforts to push the SRO issue this year in Congress had ceased, as Rep. Spencer Bachus’ bill that called for an SRO to oversee advisors had failed to garner any support last year and would likely not get support from current House Financial Services Committee Chairman Rep. Jeb Hensarling.
But sources told me after that article was published that FINRA had shifted its strategy to the Senate, and was looking for Senate backers of an SRO bill (See “Ketchum’s Big SRO Omission,” Investment Advisor, March 2013).
Heath Abshure, president of the North American Securities Administrators Association (NASAA), and Steve Irwin, the Pennsylvania Banking and Securities commissioner, both told me recently that while FINRA did “revise” its SRO plan to focus on Senate backers, Senate Banking Committee members are waiting to see how White takes to the SRO idea before agreeing to sponsor such legislation.
White didn’t mention the SRO issue during her nomination hearing before the Senate Banking Committee and, through a spokesperson, declined to comment on the issue, as she had yet to be confirmed to the agency.
For White, who by the time you read this has likely already been confirmed as the new SEC chair, bolstering the agency’s enforcement will also be a priority. She told members of the Senate Banking Committee that enforcement “must be fair, but it also must be bold and unrelenting.”
Investors and all market participants, she continued, “need to know that the playing field of our markets is level and that all wrongdoers—individual and institutional, of whatever position or size—will be aggressively and successfully pursued by the SEC.”
Besides Dodd-Frank and JOBS Act rulemakings and enforcement issues, White said her other priority areas will be to:
- Continue “rigorous economic analysis” to inform and guide commission rules
- Fully understand “all aspects of today’s high-speed, high-tech and dispersed marketplace so that it can be wisely and optimally regulated, which means without undue cost and without undermining its vitality”
- Focus on money-market funds, private fund advisors, credit rating agencies and clearing agencies
Despite the fact that the Financial Stability Oversight Council (FSOC) voted unanimously in November to advance proposed changes to money market funds and seek public comment, White told lawmakers that money market funds are “investment products and the SEC should take the lead” in writing further rules to reform them.
Sen. Elizabeth Warren, D-Mass., told White that the CFPB has met “all” of its Dodd-Frank deadlines while the SEC has “missed about half.” The SEC, Warren said, has not written any rules regarding credit ratings agencies, derivatives or disclosure of CEO pay. “I hope these will be on the top of your list,” Warren told White.