More On Legal & Compliancefrom The Advisor's Professional Library
- Proxy Voting RIAs are not required to vote proxies on behalf of their clients. However, when an RIA does assume responsibility for voting proxies, the firm’s policies and procedures should help to ensure that votes are cast in the best interest of clients.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
As summer winds down, I know that many of you are wondering what’s going on with investment advisor user fees and other ways to deal with the problem of infrequent SEC examinations – such as legislation to establish a self-regulatory organization (SRO) or regulations that would require advisory firms to have a third-party audit. Here’s the latest…
As you may recall, HR 1627, the Investment Advisor Examination Improvement Act, was introduced last year by Rep. Maxine Waters (D-California). The bill authorizes the SEC to impose user fees on SEC-registered investment advisory firms for the sole purpose of enhancing the agency’s examinations of advisory firms.
Since then, the bill has basically just been sitting there. But, lo and behold, there are some recent positive developments.
First, the June 30 report from the SEC’s Investor Advocate recommended that Congress enact user fee legislation. Second, Rep. Waters sent a letter to House Financial Services Committee (HFSC) Chairman Jeb Hensarling (R-Texas) requesting a hearing on the bill. That was followed by the addition of more than a dozen HFSC Democrats as cosponsors of HR 1627. And then, Rep. Spencer Bachus (R-Alabama), the previous chairman of the committee who introduced SRO legislation two years ago, became a cosponsor of the user fee bill. (See Rep. Bachus Backs Waters' User-Fees Bill)
This last development was particularly gratifying for me as I distinctly recall sitting in the hot seat at the witness table before then-chairman Bachus and the full HFSC at a hearing on his SRO bill on June 6, 2012.
At that hearing, I testified in strong opposition to the SRO legislation, arguing that it would enable FINRA – a private entity that suffers from a lack of accountability and transparency, a poor track record and excessive costs – to regulate and examine thousands of advisory firms. In a stunning turnaround two years later, Rep. Bachus became the first Republican to endorse the user fee approach.
I am certainly aware that time is running out for this Congress. It will be difficult to enact any legislation in the remaining days that the 113th Congress is in session. But I predict that HR 1627 will gain additional cosponsors – including Republicans – before the year is out. It’s even possible that similar bipartisan legislation will be introduced in the Senate, setting the stage for serious consideration of the bill next year.
Thankfully, the SRO legislation that was alive and well just two years ago has not been reintroduced during this Congress. While FINRA CEO Rick Ketchum said earlier this year that they are not pursuing similar legislation “at this time,” I would emphasize the quoted words. The bottom line is that FINRA has not given up on the idea of expanding its jurisdiction to include the investment advisory profession.
The latest “new” idea comes from SEC Commissioner Dan Gallagher, who suggested that the SEC should consider regulations requiring investment advisory firms to be examined by FINRA or other third parties.
This is not a novel idea; the SEC asked for comments on this concept back in 2003. In our written response to Commissioner Gallagher a few weeks ago, we suggested that such issues are “worthy of debate” but that we have concerns “about the potential disadvantages” of third-party exams as compared to SEC exams. These concerns include the “standards to be applied in such examinations, the scope and frequency of any such examinations, the qualification and SEC oversight of third parties, confidentiality, and cost to advisors.”
We suggested that a good starting point would be for the SEC to look at the types of voluntary third-party reviews that investment advisory firms currently utilize, such as financial audits, internal control reports and compliance reviews by third parties, mock audits and internal audits.
I will be curious to see how the debate unfolds in the coming weeks and months. While some believe that Congressional resolution of these longstanding issues is unlikely, I believe that the user fee approach has some momentum.
I urge you to add your voice to this debate.
As always, I welcome your thoughts and feedback.