Donohue on the Rand Report & Paulson

One area of concern where broker and advisor services are similar is the use of C shares and wrap accounts, Donohue said. “You could look at C shares of a mutual fund not being that dissimilar from a wrap account–yet they are subject to two totally different regulatory regimes. There is a concern, and FINRA talks about this from time to time, that [this is] an uneven playing field; folks [are] doing very similar things [with C shares and wrap accounts], one subject to an advisor regulatory regime and another subject to the broker/dealer regulatory regime, and is there opportunity for folks to arbitrage–in terms of selection–of being under one regime or another. That isn’t really based on what’s best for clients.”

The IAA’s Tittsworth says that one recommendation that Cox could get from Donohue and Surri is that there be an SRO created for investment advisors. (Treasury Secretary Henry Paulson’s blueprint for a broad overhaul of financial services regulation–see separate story on page 48) also calls for an SRO for advisors. I asked Donohue if he thought an SRO for advisors was warranted, and he replied that while he doesn’t have “a view at this point on whether an SRO is necessary in the advisor space or not,” there are advantages to having an SRO. “One advantage is that there’s another body out there that may have resources that might exceed ours.”

The Associations Weigh In

Naturally, both IAA and the Financial Planning Association (FPA) are opposed to an SRO for advisors (FPA President Mark Johannessen addresses the issue on the Soapbox on page 136). Treasury’s blueprint argues that investment advisors should be overseen by an SRO because of the “continued convergence of the services provided by broker/dealers and investment advisers,” but Tittsworth says this does not justify establishing an SRO for advisors. Furthermore, he said in a prepared statement that direct regulation of advisors by the SEC is “appropriate and effective,” adding that “the reasons that persuaded Congress to authorize the creation of an SRO for broker/dealers–the high level of interconnectivity between broker/dealers and the technical issues related to settlement, execution, and reconciliation involving broker/dealer transactions–simply do not exist in the investment advisory profession.”

Another area that Donohue says SEC examiners will be scrutinizing this year is separately managed accounts. He told IAA conference goers that managed accounts have experienced rapid growth, and have “been an innovative way for firms to meet client demands for more unified portfolio management and possibly provide cost savings through the bundling of advice, brokerage, and custody.”

However, he said, managed accounts also “create challenges for compliance personnel and the firm’s regulators.” SEC staff, he warned, will be “interested in learning about [advisors'] experience in placing clients in managed accounts.” For instance, he said, the SEC wants to know “how firms determine that a managed account is the appropriate account for a client and how firms determine that clients are receiving the full value of these accounts and particularly of the ‘bundled’ brokerage services.” Plus, he said, SEC wants to learn what brokerage services clients typically use in these accounts and how frequently they use them.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].