More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Rick Fleming, the Securities and Exchange Commission’s new investor advocate, said Thursday that the Dodd-Frank Act gave his office “broad authority” in overseeing issues that impact investors.
A "big part" of the Office of Investor Advocate’s job, Fleming said during a meeting of the Investor Advisory Committee at SEC headquarters in Washington, will be in the policy area. “Dodd-Frank gave me pretty broad authority to look at issues that affect investors,” and that includes rulemakings, legislation on Capitol Hill or specific products, he said.
Fleming, who’s also a member of the Investor Advisory Committee, was appointed the SEC’s first Investor Advocate on Feb. 12 and assumed his role on Feb. 24. He noted that he’s one to “work long hours” when he believes “injustice is being done. I bring that approach to this job.” Added Fleming: “I will investigate before I advocate, to work on behalf of investors.”
One injustice that Fleming said he handled while serving in his former role as the deputy general counsel for the North American Securities Administrators Association was bringing criminal charges in a churning case. Fleming said that he saw the broker’s churning to generate commissions as more than an ethical violation because the customer was at a mental institution. “That [case of churning] was more than an ethical violation, it was a fancy way of stealing money.”
Fleming said his office will have six employees, including himself, and that he’s currently hiring an ombudsman, two senior attorneys, a junior attorney and an economist. The ombudsman, he said, will be the point person for investors to go to if they have a problem with the SEC, not with their broker or advisor.
The committee also appointed Kurt Schacht, managing director of the CFA Institute, as its new chairman. He replaces Joseph Dear, the former chief investment officer of the California Public Employees’ Retirement System, who died of prostate cancer in late February. Dear was 62.
The committee’s Investor as Purchaser subcommittee also proposed a set of recommendations for the SEC to consider as it writes rules for crowdfunding.
The subcommittee recommended that the SEC:
Adopt tighter restrictions on the amounts that investors can invest in crowdfunding;
Strengthen the mechanisms for the enforcement of the investment limits in order to better prevent errors and evasion;
Clarify and strengthen the obligations of crowdfunding intermediaries to ensure compliance by issuers with the crowdfunding title and relevant regulations;
Take further steps to ensure that educational materials clearly convey the required information and are reviewed and, to the degree possible, understood by investors; and
Withdraw its proposed definition of electronic delivery, which fails to ensure that investors actually receive the required disclosures and educational materials, and continue to rely instead on the strong and effective policy for electronic delivery adopted by the Commission in the mid-1990s.
Barbara Roper, director of investor protection for the Consumer Federation of America, who heads the subcommittee, noted during the meeting that the SEC has a “daunting task” in writing crowdfunding rules as there are “20 some rulemaking areas” for the commission to consider.
“It’s a very daunting task to create this new marketplace and write the rules in a way to maximize the benefit for investors and minimize the risk,” Roper said.
She noted that companies’ failure rates worry her more than the fraud that could come with crowdfunding, noting “there will be fraud.”
Said Roper: “I’m far more concerned [that] many of these companies will fail, for a variety of reasons. So unsophisticated investors will participate in a market with a high failure rate.”
Another concern is that the “madness and the potential for people to get carried away” through crowdfunding could cause people “to pay way too much for the stocks.”
Indeed, SEC Commissioner Kara Stein noted during her Tuesday speech at NASAA's public policy conference that the Commission "has another great opportunity in its rulemaking for crowdfunding," as crowdfunding "holds the promise of harnessing the power of the internet to provide capital for start-ups and small businesses that otherwise lack access to such capital."
But, she continued, "with that opportunity also comes risk. Ordinary people, like a teacher in Iowa, or a retiree in Tampa, may not be equipped to assess the risks of an investment offer coming via the internet. We all need to make sure that crowdfunding isn’t turned into a new, cyber-version of boiler rooms."
Investing in startups "is a risky business," Stein added. "And potential crowdfunding investors should know that the risks include not just whether the company is successful, but also whether the company will dilute or otherwise devalue their investment as the company moves forward."
Check out SEC Seeks Comments on Target-Date Fund Marketing on ThinkAdvisor.