Capitol Punishment?

And “it’s a big mistake” that advisors must file their ADVs with the National Association of Securities Dealers Regulation (NASDR), Stanasolovich says, because it provides renewed impetus to the NASD’s long-held desire to regulate advisors. This issue tends to rear its ugly head every couple of years, he says, and would be detrimental to advisors if adopted because it would basically put advisors under the purview of broker/dealers. “The NASD is focused on those people that sell things for commissions and work for the broker/dealer, not for the client,” Stanasolovich says. “I think there’s a distinctive difference there.”

Planner Curt Weil, of Weil Capital Management in Palo Alto, California, says planners are still in the dark about when the SEC is going to unveil an electronic version of ADV Part 2, though it’s going to be “narrative” in form, he says.

Nancy Lininger, a consultant with The Consortium in Camarillo, California, which provides compliance and marketing services to investment advisors and broker/dealers, says while federal advisors have already had to file their Form ADV electronically on IARD, state-registered advisors can file voluntarily until their state sets a deadline. The next filing deadline for the IARD, she says, is transferring broker/dealer reps onto the system. “The states are just now setting deadlines to transfer the [B/D] reps onto the system, and many states are setting June to August deadlines, so that’s coming up,” she says. “That means you have to start getting this info onto the system.”

Weil, who was recently examined by the SEC, conducts a study group of 40 advisors in the South Bay area, and at the last meeting a compliance expert was on hand to prep advisors for their exam. Advisors were told to fix any problems cited in the last SEC exam, to perform a “best execution” survey–including small advisors who sometimes ignore this area–and to disclose soft-dollar arrangements in their Form ADV. “We also hear that a proper written disaster plan is being required, and that our ADV and/or contract should mention that, if we use mutual funds, the client is subject to an added layer of fees–ours and the fund manager’s,” Weil says.

Planner Stanasolovich says he’s having a hard time figuring out how to comply with the “best execution” standard. “The SEC is not providing any feedback,” he says. “Because we don’t run multiple custodians, it’s tough to say our order was filled in so many seconds. We say we choose a custodian because we get relatively quick execution and the prices are cheaper. But now [the SEC] expects us to compare some alternatives, which certainly from a price standpoint we can do, but how fast it actually goes through, that’s another story. I’m just concerned that [the SEC] isn’t providing any hardcore guidelines, and, to a large degree, what they expect is unrealistic.”

Hedge Funds, Web Services, and Identity Fraud

The SEC is also stepping up its oversight of advisors’ “preferential treatment” of hedge funds. The regulator says that “an increasing number of advisors are allowing one or more of their portfolio managers to create and manage a hedge fund or other private equity fund side by side with the portfolio manager’s management of a registered investment company or traditional separate accounts.” During exams, the SEC says it will question how the advisor allocates securities and determine whether the advisor is appropriately managing all of the accounts.

And last month, the SEC adopted new rules: Investment advisors conducting most of their business through an interactive Web site could register with the SEC, instead of with various states; a new Form N-6 was instituted for the registration of variable life insurance, which sports a shortened and simplified prospectus; and the definitions of “equity security” in rules under the 1933 and 1934 acts now include security futures.

Advisors should also be alerting clients to a new identity fraud scam that has cropped up, says Lininger. Consumers are receiving an “official-looking” letter that’s supposed to be from their bank, she says. The letter requests that clients fill out an IRS form W-9095 in order to update resident and non-resident alien and citizen records “to enable us to detect persons exempted from the U.S. reporting and withholding tax on interest paid to you on your bank account and other financial dealings.” Consumers are to then fax it to a number designated in the letter. “It’s a fictitious IRS form and the fax number goes to these people who are stealing identities,” she says. The Office of the Comptroller of the Currency is asking consumers to report receipts of the letter. For more information, log on to www.occtreas.gov and click on the April 5 alert.

This tally of compliance issues is surely just the tip of the iceberg, and for the sake of their practices and their clients, advisors will do well to stay abreast of relevant compliance issues. And since I recently moved from New York to Washington, I’ll do my best to help keep you up to speed.