More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Securities and Exchange Commission should revisit the idea of using third-party audits to boost the number of advisor exams in lieu of assessing user fees or appointing a self-regulatory organization to conduct such exams, says fi360.
In a March 10 comment letter to the SEC on the agency’s recently released five-year strategic plan, Duane Thompson, senior policy analyst at fi360, and Carlos Panksep, managing director of fi360’s Centre for Fiduciary Excellence (CEFEX), told the SEC that it should consider “alternative” approaches to hiking its advisor exam rate, as attempts to push user fees as well as a self-regulatory organization have stalled.
“It is obvious that the SEC is challenged by the continued robust growth in the number of investment advisor registrants amid a time when Congress is faced with a budget sequester and other fiscal restraints,” Thompson and Panksep told SEC Chairwoman Mary Jo White, as well as the four commissioners and top officials. “Combined with the current fiscal austerity climate and legislative gridlock in Washington, the Commission cannot be assured of a sustainable financial commitment to its National Examination Program without considering other alternatives.”
Fi360 shares other fiduciary advocates’ support for the SEC putting brokers under a fiduciary mandate and is also opposed to the Financial Industry Regulatory Authority stepping in under an SRO model to examine advisors. Legislation to appoint FINRA as an SRO failed under former House Financial Services Committee Chairman Spencer Bachus, R-Ala.
The Investment Adviser Examination Improvement Act, a bill introduced by Rep. Maxine Waters, D-Calif., to allow the SEC to collect user fees to fund advisor exams has been languishing in the House with little support. But Neil Simon, chief lobbyist for the Investment Adviser Association in Washington, said in early March that IAA and other planning groups are “working hard” to get a bipartisan user fees bill introduced in the Senate that mirrors the Waters bill, H.R. 1627. FINRA, Simon said, is still actively “laying the foundation for a future lobbying efforts” to ensure it becomes the SRO for advisors.
The SEC is also unlikely to get the budget boost set out in President Barack Obama's recently released 2015 budget.
While the use of third-party audits to boost advisor exams was not one of the three options set out in Section 914 of Dodd-Frank, both Thompson and Panksep note that the SEC sought comments in 2003 on the topic and in 2009, former SEC Chairwoman Mary Schapiro raised the issue again in testimony before Congress.
“Given the challenges in crafting a five-year strategic plan that meets one of the SEC’s most critical objectives, i.e. to promptly detect and deter securities law violations, fi360 and CEFEX believe, and would respectfully suggest, that leveraging private sector assistance through third-party compliance reviews – the same concept considered by the commission in 2003 and advanced by Chairman Schapiro in 2009 – is an appropriate and more assured means of enhancing investment advisor examinations and increasing investor protection,” Thompson and Panksep wrote.
Opponents of the third-party audits say they could prove costly.
CEFEX fiduciary assessments, the two execs continue, “are based on the ISO standard 19011, which provides for qualitative system audits of a service-oriented business.” The CEFEX assessment program “also relies in part on quantitative tools for assessing prudent practices of investment advisory firms by importing data from Morningstar’s extensive database and then comparing similar investment products to their assigned peer group, based on factors such as organization stability, style drift, expense ratios, and risk-adjusted performance.”
In addition, firms that wish to be certified as conforming to fiduciary best practices and listed on CEFEX’s publicly accessible database “are also subject to a review of compensation models and how conflicts of interest are managed,” the two write.
“This kind of registry, by coincidence, is consistent with the same concept advocated by Chairman Schapiro’s testimony in 2009 supporting public access to certifying audits and the auditors.”
Check out Advisor Groups ‘Working Hard’ to Get Senate User Fees Bill on ThinkAdvisor.