More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- 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.
The Securities and Exchange Commission’s Investor Advisory Committee approved Friday two of its subcommittee’s recommendations: one on how the SEC should move forward on crafting a fiduciary rule for brokers, and a second proposal requesting that the SEC ask Congress to allow the agency to impose user fees on advisors to fund their exams.
The recommendations were put forth by the Investor as Purchaser subcommittee, which is chaired by Barbara Roper, director of investor protection at the Consumer Federation of America.
SEC Chairwoman Mary Jo White said before the meeting that she looked “forward" to hearing about the committee’s recommendations, "both of which I consider very important.”
The subcommittee recommendation on how brokers should be put under a fiduciary mandate sailed through the full committee Friday in little time and with much praise. Committee member Steve Wallman, founder and CEO of FOLIOfn and a former SEC commissioner, said that as the only “broker-dealer in the room,” he thought the subcommittee’s plan was “an excellent approach,” and that it “would be a terrific step forward” in informing the SEC fiduciary rule as well as the one being crafted by the Department of Labor.
While committee members supported assessing user fees to help boost advisor exams, they voiced concern with how the user fees would ultimately be assessed and whether the cost would trickle down to investors.
The subcommittee believes that the SEC should request legislation that would allow it “to impose user fees on SEC-registered investment advisors to enhance advisor exams, including more frequent onsite exams,” said Craig Goettsch, director of Investor Education and Consumer Outreach at the Iowa Insurance Division.
The subcommittee noted the support among industry groups for the user-fees bill that was introduced during the current Congress by Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services Committee.
H.R. 1627, the Investment Adviser Examination Improvement Act of 2013, "enjoys support from many investment advisor industry associations," the subcommittee said. No companion legislation has been introduced in the Senate.
Roper told ThinkAdvisor that while the subcommittee recommendation "doesn't specify a legislative vehicle, the Waters bill would be consistent with our recommendation."
As White noted in a recent speech, five years after the financial meltdown, approximately 40% of SEC-registered investment advisors (who collectively manage $50 trillion) still have not received their first SEC examination.
“We’re going to tread water if we’re looking for an appropriation” from Congress to help boost advisor exams, Goettsch said. “I’m guessing the [user-fees] cost will be passed on to clients eventually, but we’re talking about firms with more than $100 million” in AUM. The lack of advisor exams “is a ticking time bomb if we don’t address it.”
Indeed, Roper added that the legislation “allows fees to be assessed so that it adjusts the burden of the fees to the size of the firm.” While the investor subcommittee “supports any number of different ways to solve this [advisor exam] problem, this user-fees [legislation] seems like the most doable of the options. There’s no reason it should be a partisan issue.”
Andrea Seidt, president of the North American Securities Administrators’ Association, noted in a statement after the Investor Advisory Committee meeting that “by authorizing the SEC to use revenue derived from the self-funding of examinations to augment [the Office of Compliance Inspections and Examinations'] exam program, the legislation recommended by the IAC would permit the SEC to establish and maintain a robust advisor examination program that periodically adjusts to correspond to changes in its examination responsibilities.”
While the SEC has requested that Congress provide the agency more funding so that it can add 250 more examiners, which Seidt says is “the easiest and least expensive way” to address the problem, a user-fees bill “would appear to create a viable, long-term solution to a problem that has plagued the SEC for decades.”
While the SEC is not bound by any recommendations of the Investor Advisory Committee, Section 911 of the Dodd-Frank Act requires the SEC to “promptly issue a public statement assessing the finding or recommendation of the committee,” and to disclose any action the commission intends to take regarding that recommendation.
White noted that since the committee’s last meeting and recommendation, the committee has gotten a letter from SEC staff regarding its proposal to require “glidepath” illustrations in target-date funds. In recent months, White said, the Division of Investment Management has said it would be useful to request additional comments on the advisory committee’s proposal. “I’m hopeful that target date funds will be included in the commission’s rulemaking in the coming year,” she said.
Check out SEC Investor Committee Issues Fiduciary Plan on ThinkAdvisor.