More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
For advisors changing broker-dealers, financial assistance in the form of forgivable loans is standard procedure for regional broker-dealers and wirehouses, but less common in the independent channel. Wirehouses commonly offer up to 300% of trailing 12 months’ production. In the independent channel, for those firms that even offer forgivable notes, the amounts are typically in the range of 10% to 20% of trailing 12 months’ production.
The new disclosure rule will not apply to incentives totaling less than $50,000. While that figure might look reasonable at first glance, applying a static amount as a guideline fails to differentiate between large and small producers.
For example, in the independent channel, forgivable note money is intended to cover initial transition expenses and potential downtime during the transition (one to three months) of their book of business. A large producer may have 1,000 ACAT transfers, which between qualified and non-qualified accounts can average out at $100 per ACAT transfer. This activity alone equates to a $100,000 expense.
Still not accounted for are registration costs, business cards, stationery, staffing costs for transition paperwork and for those coming from a wirehouse to an independent firm, the added expense of setting up an office. If regulators had even a shred of common sense, they would apply the disclosure rule to a percentage of trailing 12 months’ production with a 30% cap, which would represent a fair percentage to justify coverage of transition expenses and production downtime. Anything above that 30% threshold could be considered more than transition needs and therefore in need of disclosure.
Transition money is market driven. As the demand for quality reps increases, transition money typically increases to sync to that demand. Government regulators have a history of disdain for private sector industries that make large sums and are thus imposing greater scrutiny. However, when the tables are turned, those same regulators are resistant to disclose anything of what they spend or how they spend it.
Case in point: the $787 billion in economic stimulus, which we were told would spur the economy and create jobs, was spent mostly to fund existing government jobs. At the start of the 2008 recession only one person made $170,000 or more in the Department of Transportation. Just 18 months later, 1,690 employees made more than that amount. The Agriculture department is another spending behemoth, with a budget totaling more than the net incomes of all the nation’s farmers.
This new compensation disclosure rules demonstrates the grind of government regulators telling us to “do as we say, not as we do.” It’s getting tiresome.