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February 01, 2008 at 02:00 AM
The New Year is upon us, and perhaps the most significant event for the advisory industry has already taken place–the Rand report assessing the advisory and broker/dealer industries was released in early January. No doubt advisors, brokers, and industry officials will spend some quality time reading through the report, and will anticipate any possible regulatory actions that the SEC may take when it gets recommendations from SEC staff by early summer.
Granted, the fact that it’s an election year (as we’re all aware) may hamper any chances that the SEC–or Congress, if the Commission asks for legislative remedies–will act speedily in making sure some change is accomplished this year. Industry officials speculate, though, that Congress could hold some hearings on the Rand study’s findings in 2008. The fact that the SEC is already down one commissioner–with another one set to leave–also puts the securities regulator on somewhat unstable footing, and may not bode well for any meaningful change to be ruled on this year.
Commissioner Annette Nazareth has one foot out the door as she announced October 2 her intention to leave the Commission to return to the private sector, while Roel Campos left the Commission in September to join the law firm of Cooley Godward Kronish. Word is swirling around, too, that SEC Chairman Christopher Cox wants to hightail it out of the Commission even before the Presidential election occurs, and won’t stick around even if a Republican President is elected.
The Rand report revealed, not surprisingly, that investors are indeed confused about the differences between brokers and advisors. While previous reports have uncovered this, the SEC’s primary mission is protecting investors, so the Commission should take the Rand report’s finding “really seriously,” says David Tittsworth, executive director of the Investment Adviser Association in Washington.
Joel Beck of The Beck Law Firm in Snellville, Georgia, which represents broker/dealers and advisors, writes on the firm’s blog (www.bdlawblog.com) that the fact that clients generally don’t understand the differences between brokers and advisors, “including the differences in responsibilities of the two, seems to create an opportunity to educate and sell clients on the different models, and allow wise firms to distinguish themselves from the competition.” He speculates one remedy would be for the SEC to issue “updated regulations” that “require additional disclosures be given to clients to inform them of the differences between RIAs and B/Ds.”
The Trouble With Disclosure
Disclosure is, indeed, the key to all understanding, notes Terry Weiss, a partner with Sutherland Asbill & Brennan in Atlanta. But he takes the view that investors’ failure to read the documents they’re given contributes to their lack of understanding of not only products, but also of their broker’s or advisor’s duties. While trusting their advisor or broker to adequately explain things to them is of paramount importance, investors “owe an obligation to themselves to review the documents that they are given,” he argues.
In September, the SEC issued a proposed rule, “Interpretive Rule Under the Advisers Act Affecting Broker/Dealers,” that some industry officials say will exacerbate investor confusion. The proposed rule reinstates three provisions related to rule 202(a)(11)-1, which was vacated by the District Court for the District of Columbia, in Financial Planning Association vs. SEC–the well-known ruling exempting brokers from being subject to regulation as investment advisors in fee-based brokerage accounts.
