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.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
At this point, it’s hard to imagine that there’s really anything new left to say about the reregulation of financial advisors under the Dodd-Frank Act. The latest round of comments to the SEC has revealed the commission’s leanings toward vastly watering down a “fiduciary” standard for brokers, with the securities industry applauding and reiterating its Chicken Little claims of higher costs and fewer investor choices, while proponents of a ‘40 Act-like standard for brokers (as is mandated by Dodd-Frank) are crying “horse-hockey” once again, backed by mountains of data and analysis.
Yet in his Aug. 1 column on Financial-Planning.com, “How to Fix Advisors’ Regulatory Woes,” Bob Veres offers a typically novel perspective on the debate. Some will undoubtedly criticize his retro, laissez-faire solution, but I suspect Bob’s intention is to refocus the debate away from what’s best for the brokerage industry, and back onto what’s best for investors and client-oriented advisors.
Bob starts with the (hard to argue with) concern that both the SEC and FINRA have undergone “regulatory capture” by the industries they purport to regulate, which he says gives consumers “the illusion that they're being protected without the actual substance.”
As I read it, the solution he offers is a two-pronged plan to beef up the regulation of financial institutions while deregulating the delivery of financial advice. For instance, all financial and investment advisors would have to work through custodians, who would be regulated, and required “to prove that the customer's money is where the account statements say it is.” And investment companies would have to stand behind their products through a requirement “to buy back their toxic sludge at the original selling price if a judge rules that the products were not created with the best interests of the consumer in mind.”
But on the advice side: “Caveat emptor!” Bob wrote. “Consumers would know that nobody is monitoring the quality of advice they receive. They can take their financial advice from a neighbor, or their barber... …Or they could choose to work with a credentialed professional.”
Taking this point to its logical (illogical?) end, Veres wouldn’t even require any advisors to be fiduciaries: “Let people self-proclaim what standard they intend to live up to—but hold them to that standard in court. That would instantly create a visible differentiation between salespeople and real advisors, and it would save us a lot of regulatory time and energy trying to make these fine distinctions from the outside.”
But would it? RIAs will recognize that much of what Bob is proposing is their current regulatory system, with the added benefit of having the SEC off their backs, which is no small thing. At the same time, though, his plan essentially ignores the decades-old problem that Section 913 of Dodd-Frank tried to solve: that some securities salespeople hold themselves out to the public as “advisors” without meeting the ‘40 Act standards, including the duty to put the interests of their clients first.
We have nearly half a century of history that, if nothing else, clearly shows that retail investors cannot make the fine distinction between fiduciary and non-fiduciary “advisors” despite the available information and disclosures that are currently required, however minimal and obfuscating they may be. Imagine their confusion in a completely unregulated world.
Bob Veres’ vision of an “unregulated” advisory world would indeed offer many benefits including, as he suggests, eliminating regulatory recapture, lowering costs, and making advisors’ lives easier and allowing them to spend more time on their clients’ needs. But for the courts to effectively pick up the regulatory burden, we still need a fiduciary standard that retail financial consumers can easily understand—and recognize.
To that end, here’s my two-point plan:
1) Eliminate the broker exemption to the ‘40 Act, rendering everyone who gives investment advice to be “investment advisors”
2) Clarify that anyone who uses the word “advisor/adviser” in reference to themselves or their firm in any of their client communications is an RIA subject to the ‘40 Act. That way, even Money magazine can get the distinction—and clients will know at a glance what their “advisors” are, and what they aren’t.