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.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
Daniel Gallagher, one of the Securities and Exchange Commission's two Republican commissioners, has been very vocal as of late regarding his belief that the agency doesn't need to write a rule to put brokers under a fiduciary mandate.
In mid-March, Gallagher said that he's “not sure a majority of the commission believes we need to use” the authority under Section 913 of the Dodd-Frank Act to write a uniform fiduciary rule, which SEC Chairwoman Mary Jo White has said the agency will determine this year.
Then in mid-May, he told IA that the debate over whether the SEC should write a fiduciary rule is “not fair right now” because of a mismatch in advisor/broker exam data—suggesting that a self-regulatory organization needs to be appointed to help the agency create a “real exam program” for advisors.
The debate over whether the agency should use its authority under Section 913 of Dodd-Frank to write a uniform fiduciary rule for brokers and advisors “has been colored by a view of brokers that's decidedly negative,” Gallagher said. “If you talk to many of the consumer advocates and others, they will cite to you all of the transgressions of the brokers.”
But “there are so many public displays of malfeasance in the brokerage industry because we [the SEC] resourced oversight of brokers so much more than advisors. Therefore, we know a lot more about brokers and their practices—we know when they are committing rule violations, and there are so many more [BD] rules to violate.”
In the Section 913 debate, Gallagher continued, “advisors are always seen as pure and brokers are seen as miscreants and especially now after Title IV of Dodd-Frank added so many more [private fund advisors] to our rolls; we simply don't have a good enough understanding [of advisors] and the enforcement statistics that we have on the broker side so that we can have an informed debate.”
Gallagher reminded IA that he's “been pretty clear that I don't think we need to do a [fiduciary] rulemaking, so if it takes years until after we have a real exam program for advisors [to reassess a fiduciary rulemaking], that's fine with me.”
In a speech in mid-May at the 46th annual Rocky Mountain Securities Conference in Denver, Gallagher said that the SEC's failure to catch investment advisor wrongdoers as quickly as those in the broker-dealer realm is due to the lack of a self-regulatory organization for advisors as well as “unfunded mandates” imposed upon the SEC by the Dodd-Frank Act.
Gallagher noted in the speech the “eye-opening” results of recent statistics that he requested from the SEC's Office of Compliance Inspections and Examinations, which were based on disclosure information submitted by broker-dealer registered reps on FINRA's BrokerCheck system.
“An astounding 20% of the 600,000 plus actively licensed registered representatives have between one and five disclosures for items such as customer complaints, regulatory violations, terminations, bankruptcy, judgments and liens,” Gallagher noted. “One active—and currently employed—registered rep has disclosed a whopping 96 customer complaints and disputes. Another individual has made 21 financial disclosures relating to bankruptcies, yet still is licensed and working in the industry. At the firm level, 17% of broker-dealers had more than six total disclosures and 5% had more than 20 disclosures.”
However, Gallagher noted in the speech that “there are plenty of repeat offenders at investment advisory firms who are engaging in misconduct,” but that the SEC is “just not finding them as quickly because the SEC allocates a disproportionate amount of resources to policing the activities of broker-dealers when compared to those we expend policing investment advisors.”
The SEC, he said, has the Financial Industry Regulatory Authority to help it oversee 4,300 broker-dealers, whereas the commission has no help from an SRO like FINRA to help it examine the 11,100 advisors.
“Simply put, it is impossible to separate the fact that we find many more broker-dealer violations than investment advisor violations from the fact that thanks to the assistance of the SROs, we examine a greater proportion of broker-dealers than investment advisors,” Gallagher said.
Despite recent comments by FINRA CEO Richard Ketchum that the self-regulator's efforts to become the SRO for advisors has, for now, died on the vine, Gallagher hinted at defining a “third-party” examiner as an SRO.
The commission should also consider fixing the exam imbalance by allowing third-party advisor exams—including, “potentially, defining the term ‘third party’ to include SROs in order to allow the SROs currently involved in broker-dealer oversight to conduct examinations of ‘dual hatted’ investment advisors as well.”
Said Gallagher: “Leveraging the current resources and expertise of broker-dealer SROs to assist in investment advisor examinations could greatly facilitate our ability to examine advisors without undertaking the daunting project, with Congress, of creating a new investment advisor SRO out of whole cloth.”
Rep. Spencer Bachus, R-Ala., the former chairman of the House Financial Services Committee who now serves as chairman emeritus, told SEC Chairwoman Mary Jo White in late April that despite his failed attempts to get a bill passed supporting a self-regulatory organization to help boost advisor exams, she should continue exploring options to increase advisor exams.
The “advisor community,” Bachus said, “seems to embrace” the user fees concept. “I would urge you to continue to keep this [advisor exams issue] as a priority, and that all of us will work together to resolve this.”
Rep. Maxine Waters, D-Calif., told White the same day that she was “pushing very hard” to secure support for her user fees bill, the Investment Adviser Examination Improvement Act of 2013, H.R. 1627, which would allow the SEC to collect user fees to fund advisor exams.