More On Legal & Compliancefrom The Advisor's Professional Library
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- 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.
The Securities and Exchange Commission should be allowed to collect user fees to fund advisor exams, because despite the fact that the agency’s national exam program’s spending has increased, the exam division’s budget has been “dwarfed” by the growing number of advisors as well as their complexity, leaving it unable to “improve overall” exam coverage of advisors, the SEC’s investor advocate said in a Tuesday speech.
In his speech before the 38th Annual Southwest Securities Conference in Dallas, Rick Fleming referred to his recent report to Congress, in which he said that investors faced “substantial risk” due to the lack of advisor exams performed by the agency, and recommended that Congress authorize the SEC to collect an annual user fee from RIAs and “to limit the use of those funds to expenses associated with investment advisor examinations.”
While critics say a user fee “sounds a lot like a tax,” Fleming said, "several industry associations that represent investment advisors have actually endorsed the concept of user fees." These groups, he said, “recognize that a rogue advisor not only harms investors, but also leaves a stain on the advisory industry, so they support an increased regulatory presence and are willing to pay for it. Let me repeat that — they are willing to pay more money to the SEC so that it can conduct more examinations of advisors.”
While there are “multiple reasons” for the lack of advisor exam coverage, Fleming said in his view “it primarily boils down to the fact that the SEC has not received sufficient resources to keep up with the burgeoning workload.”
The number of SEC-registered advisors has grown by approximately 40% over the past decade to nearly 11,500. “As the number of investment advisors has grown, so too has their complexity,” Fleming said. Also, the level of assets managed by investment advisors “is on a steep ascent,” climbing from $20 trillion a decade ago to an estimated $55 trillion by the end of fiscal 2015.
In comparison, staff in the SEC’s Office of Compliance Inspections and Examinations has grown only about 10% in the past decade, Fleming said.
Fleming also noted that a "handful of major expenditures," such as technology and upgrading the agency's EDGAR system, "have absorbed much of the increase in the overall SEC budget."
These "major expenditures have been supported by members of Congress on both sides of the aisle," Fleming said, "but in my view what has not been sufficiently increased is the Commission’s ability to do some of its fundamental investor protection work like investment advisor exams – a basic 'blocking and tackling' component of the SEC."
In late July, Waters, the ranking member on the House Financial Services Committee, not only secured more Democratic support from committee members, but former House Financial Services Committee Chairman Rep. Spencer Bachus, R-Ala., agreed to co-sponsor her user fees bill.
The fees assessed on advisors under Waters’ bill would be dedicated to adding staff to OCIE.
David Tittsworth, president and CEO of the Investment Adviser Association, writes in his most recent ThinkAdvisor blog that Waters’ user fees bill “will gain additional co-sponsors — including Republicans — before the year is out.”
The user fees concept “has some momentum,” Tittsworth says.
Another option to boost advisor exams includes using third-party audits, but Fleming noted in his speech that he believes such audits are “less desirable” than user fees, adding that he “worr[ies] that it will be impossible to reverse course if the Commission starts down that road.”
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