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.
- 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.
This is William Galvin’s first appearance on the IA 25. Click here to view the complete list and Special Report schedule for extended profiles for each of the 2013 IA 25 honorees.
Since taking on an additional 139 advisors with $6.6 billion in assets under the Dodd-Frank “switch,” Massachusetts has “been able to do what the Securities and Exchange Commission hasn’t”—adequate examinations of those advisors, said William Galvin, Secretary of the Commonwealth of Massachusetts and its securities regulator.
Since last June, when advisors with assets of between $25 million and $100 million under management were required to switch from federal to state jurisdiction, Massachusetts has already examined 40% of the new firms under its purview, Galvin said, and has already “gotten a better feel for the nature of their businesses.”
For instance, while about 15% of the new advisors custody assets, Galvin said, Massachusetts examiners found that some advisors “were not reporting having custody of client assets over which they serve as a trustee or executor,” which under Massachusetts law must be included in total assets under management. When advisors are trustees they have a “different level of authority,” and “can move funds out of [a client’s] account,” setting up a “different relationship” with the client, he said.
Indeed, with a total of 929 advisors under its belt—720 of which say Massachusetts is their primary place of business—Galvin said Massachusetts has “repositioned” exam personnel to be more efficient and to help create economies of scale when it comes to examining advisors.
While still in the early stages of taking on the added advisors, Galvin said the state hasn’t noticed any “inherently evil” practices from those advisors. “We don’t want to be burdensome” on these advisory firms, he said, most of which are small businesses. In fact, he said, “it’s the people who aren’t registered” that present the biggest problems for the state.
But Galvin is no softy when it comes to reining in wrongdoers--quite the contrary.
In late March, Galvin floated a proposal to require criminal background checks for advisors registering in the state—a first for any state regulator. The comment period expired on May 15.
Galvin said in issuing the request for comment that his division “believes that it is in the public interest and for the protection of investors to conduct criminal background checks of those individuals seeking IAR registration in order to ensure that the applicant is not subject to a statutory disqualification and has truthfully and accurately disclosed any criminal background required on Form U-4.”
In February, Galvin told the SEC to ban the use of mandatory pre-dispute arbitration clauses in the contracts of RIAs, saying that such clauses may not be in the best interests of clients and that they may even be “inconsistent with the fiduciary duty that advisors owe their customers.”
Indeed, the long list of recent enforcement actions proves Galvin is one of the most active state regulators in cracking down on wrongdoers.
Galvin said that even though his state has shared jurisdiction with the SEC, “we might not wait for the SEC if it’s an egregious situation.”
A vocal proponent of putting brokers under a fiduciary mandate, Galvin said he wants “to see the SEC start moving” on its fiduciary rule.