More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
I was talking to Institute for the Fiduciary Standard’s chairman and founder, Knut Rostad, yesterday, about, well, the state of the fiduciary standard for brokers. He told me that he and IFS board members Tamar Frankel and Jack Bogle were scheduled to talk with new SEC Chairwoman Mary Jo White next week about that very topic, and asked me what I thought he should say to her. While I wouldn’t presume to advise such an august trio of fiduciary advocates, I did have some thoughts about what I would tell the Chairwoman, in the off chance that the opportunity ever arose. (Santa Fe is a long way from Washington D.C.).
At the risk of seeming impertinent (I know, it’s shocking), I’d start the conversation by admitting I prepared for the meeting by visiting the Commission’s website and clicking on the “What We Do” button. I then landed on a page that starts: “The Investor’s Advocate: How he SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation.” Right below that, the first line in the Introduction read: “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, ands facilitate capital formation.” I’d note that “investor’s advocate” and “protect investors” is right there, up front, in both sections.
I’d apologize for stating the obvious, and acknowledge that as a former U.S. attorney, she’s undoubtedly well aware of all this. And yet, I’d continue, that despite this well-known mission of the SEC, investor “advocacy and protection” seems to have gotten lost—or at least, back burnered—in the multi-year conversation about how to fulfill the Dodd-Frank mandate to create a fiduciary standard for brokers equal to the existing standard for investment advisors. “Business model neutrality,” “cost-benefit analyses,” “harmonization,” “investor choice” (which apparently is essential in broker responsibility, but not so much when it comes to arbitration) and most recently “coordination” with the Department of Labor, all have become central topics of debate, while nary a word gets uttered about protecting investors who couldn’t tell you the difference between a fiduciary duty and a suitability standard if their lives depended on it.
Then I’d respectfully suggest to the Madame Chairwoman that perhaps the SEC should redirect its focus toward putting investor protections at the top of the Dodd-Frank to-do list, starting with asking brokers to make a choice as to whether they are advisors or salespeople, not some of the time or for some clients—but for all their clients, all of the time—and then advertise themselves accordingly. If they choose to be salespeople (not that there’s anything wrong with that), then they should provide clear disclosures that their job is to represent their firm in the transaction.
Finally, I’d suggest that you can’t put a cost on the benefit of an advisor whose sole responsibility is to put the interests of her or his clients first; that perhaps a “business model” that by its own admission can’t survive if it were forced to put the interests of its clients first needs to change; that if enabled to make an informed choice, 9 out of ten investors would choose a fiduciary advisor; and, speaking of choice, that investors are not “protected” by using “harmonization” to put independent RIAs out of business with unnecessary regulations.
In short, the message that Chairwoman White needs to hear is that by taking its investor advocacy role seriously, the SEC will also better “facilitate capital formation” that is “so important to our economy” by empowering investors to make better investment decisions. That’s a business model that will pass any cost-benefit analysis.